Impact of government subsidy on diagnostic tests decisions of core products in high-end equipment manufacturing

Abstract

In the high-end equipment manufacturing industry, diagnostic test is a common procedure for core products. The core component supplier could obtain the true quality of its products by implementing diagnostic test during the R&D (research and development) process and adjusting the efforts to achieve better quality. However, diagnostic test is not well implemented due to its high cost. As China’s favorable policies increase in relevant regard, government subsidy becomes an emerging incentive for core product manufacturing. The core product supplier who receive financial incentives usually contributes extra effort to achieve better quality. However, the extra effort comes with a corresponding cost. In addition to this, the supplier has received government subsidy to fund the implementation of diagnostic test. In turn, conducting diagnostic test can provide a safety plug as to whether the supplier should receive government subsidy. To investigate this interaction between the government subsidy adoption decision and the diagnostic test decision, we use game theory to model a supply chain composed of an upstream supplier and a downstream manufacturer, where the supplier is delegated by the manufacturer to research and development a batch of core products and to maintain them during the warranty period. Our research shows that even though government subsidies can provide the supplier with direct financial support, it may still not be adopted. In essence, government subsidy has a bright side and a downside effect on supplier, wherein the former side is the direct financial support and the downside is the extra effort cost. The supplier does not always accept government subsidy because the bright side not always sufficient to cover the downside. Specifically, when diagnostic test is costly or with high-quality products, the supplier will accept subsidy but not perform diagnostic tests regardless of government subsidy. Counterintuitively, if consumer preferences for the product are high, the supplier will choose not to accept government subsidy but to perform diagnostic test. This research contributes to providing some theoretical insights for managers in the high-end equipment manufacturing industry.