Effect of Product Distribution Structures and Government Subsidy Measures on Product Quality and Consumption under Competition

Abstract

To improve social welfare and the sustainable development index, many governments introduce subsidies to manufacturers. Motivated by a subsidy program, we present a parsimonious analysis to determine the impact of subsidies when two competing manufacturers use different distribution structures under competition to sell their products in a three-echelon distribution setting. The objective is to understand better how distribution structures and social welfare measures affect the government’s decision to subsidize. We consider four different distribution structures where the government can provide subsidies to both the manufacturers or one of them. From the perspective of the social welfare optimization goal, we consider two well-established measures to analyze whether those measures impacted the overall dynamics. The two key areas: (i) the effect of distribution structures and (ii) decisions under different social welfare measures are not discussed comprehensively yet. We found that distribution structure significantly impacted product qualities, prices, and amount of government expenditure. The government may need to pay more subsidies in a distribution structure with a two-manufacturers-two-distributors-two-retailers distribution setting, where customers can receive a higher-quality product and pay a higher price. Our analysis reveals that the government’s social welfare goal can change the dynamics. Among four distribution structures, none can simultaneously ensure higher quality, product consumption, supply chain profits, and lower prices. The results provide insights for developing practical government subsidy program goals under competition.