Product subsidy and expected consumption with inventory inaccuracy: Implications of RFID adoption in Indian public distribution system

Abstract

In countries that fight malnutrition and hunger, governments and international agencies sponsor subsidy programmes to improve consumption of staple food among the poor. Although the donors in such programmes provide product subsidy to make it affordable and accessible, the supply chain used to deliver these products to the end beneficiary is prone to losses and diversion. Intervention of advanced technologies like RFID, GPS, and GIS are likely to improve the efficiency and effectiveness of such systems. However, considering budget limitation, a key concern for the donors is to investigate how diversion of fund in favour of technology would impact the product subsidy and expected consumption. We model the situation as a price-taking and price-setting newsvendor who implements the subsidy programme, and a donor who provides funding, to investigate the issue. We perform numerical analysis using actual data concerning to the food security system of India and our results show that, for both the price-taking and price-setting situation, the system with RFID generates more consumption as compared to that of the non-RFID situation at same donor budget. We also find that, fixing the price at suitable level the donors could control the profit of the implementing firm, and could generate more consumption as compared to that of the price decontrol situation.