Optimal Subsidies for Development Supply Chains

Problem definition: When donors subsidize products for sale to low-income families, they need to address who to subsidize in the supply chain and to what extent and whether such supply chain structures as retail competition, substitutable products, and demand uncertainty matter. Academic/practical relevance: By introducing and analyzing development supply chains in which transactions are commercial but subsidies are needed for affordability, we explore different supply chain structures, with product substitution and retail competition motivated by a field study in Haiti of subsidized solar lantern supply chains. Methodology: We incorporate product substitution, retail competition, and demand uncertainty in a three-echelon supply chain model with manufacturers, retailers, and consumers. This model has transactions among the donor, manufacturers, retailers, and consumers as a four-stage Stackelberg game, and we solve different variations of this game by using backward induction. Results: The donor can subsidize the manufacturer, retailer, or customer as long as the total subsidy per unit across these echelons is maintained at the optimal level. Having more product choice and having more retail channel choice can increase the number of beneficiaries adopting the products; this increase becomes more pronounced as demand becomes more uncertain. Managerial implications: Donors must coordinate across different programs along the entire supply chain. They should look for evidence in their collective experience of more beneficiaries when subsidizing competing retailers selling diverse substitutable products.