Published in:Production and Operations Management, Forthcoming
Extent:
1 Online-Ressource (33 p)
Language:
English
DOI:
10.2139/ssrn.2827299
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments August 21, 2016 erstellt
Description:
Subsidy programs are widely offered in both developing and developed countries to encourage consumption of products that generate positive social, health and environmental externalities. We study the effect of subsidies on product consumption under uncertain market demand. To reach a target consumer population, the program sponsor may subsidize a for-profit or a not-for-profit firm on each unit of the product purchased by the firm or on each unit of the sale generated by the firm. We show that subsidy programs provide stronger incentives to a not-for-profit firm than to its for-profit counterpart in inducing a large consumption whenever the sponsor is having a very limited budget or a very generous budget. When subsidizing a not-for-profit firm, the sponsor should always choose the purchase subsidy over the sales subsidy, because the former can induce a larger consumption than the latter with the same subsidy spending. However, this is not always true when the subsidy program is administered through a for-profit firm, unless the firm is a price taker in the market or the sponsor has a limited budget. Our analysis leads to new theoretical development of price-setting newsvendor problem for both the for-profit and not-for-profit operations under subsidy