Will the substitution policy resolve the shortage of personal protection equipment?

Abstract

AbstractPersonal protective equipment (PPE) like face mask is important in managing pandemic. Typically, there exist different standards for face masks such as N95 and KN95. In response to the supply shortages of N95 mask in 2020, KN95 mask was allowed to be sold in U.S. to substitute the standard product N95. This paper considers when suppliers make products to supply both domestic and overseas markets with different product standards (i.e., the standard product for domestic/overseas market is the ordinary/high‐type product), and explore the impact of the substitution policy of allowing the ordinary product as a substitutable product in the overseas market. Analytically we prove that this substitution policy is win‐win by increasing the sales in both markets when ordinary and high‐type products are close substitutes in the presence of strong diseconomies of scale in material supply, or the high‐type product has a dominant competitive advantage in the presence of strong economies of scale in material supply. By contrast, the substitution policy is lose‐lose by decreasing the sales in both markets when the competitive advantage of the high‐type product is small in the presence of strong economies of scale in material supply. Moreover, numerical studies with the real data show the robustness of our analytical findings, and unfold the backfire of imposing export restriction on the standard product for domestic market.