The Impact of Demand Uncertainty on Consumer Subsidies for Green Technology Adoption

Maxime C. Cohen (), Ruben Lobel () and Georgia Perakis ()
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Maxime C. Cohen: Operations Research Center, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139
Ruben Lobel: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
Georgia Perakis: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139

Management Science, 2016, vol. 62, issue 5, 1235-1258

Abstract: This paper studies government subsidies for green technology adoption while considering the manufacturing industry’s response. Government subsidies offered directly to consumers impact the supplier’s production and pricing decisions. Our analysis expands the current understanding of the price-setting newsvendor model, incorporating the external influence from the government, who is now an additional player in the system. We quantify how demand uncertainty impacts the various players (government, industry, and consumers) when designing policies. We further show that, for convex demand functions, an increase in demand uncertainty leads to higher production quantities and lower prices, resulting in lower profits for the supplier. With this in mind, one could expect consumer surplus to increase with uncertainty. In fact, we show that this is not always the case and that the uncertainty impact on consumer surplus depends on the trade-off between lower prices and the possibility of underserving customers with high valuations. We also show that when policy makers such as governments ignore demand uncertainty when designing consumer subsidies, they can significantly miss the desired adoption target level. From a coordination perspective, we demonstrate that the decentralized decisions are also optimal for a central planner managing jointly the supplier and the government. As a result, subsidies provide a coordination mechanism. This paper was accepted by Yossi Aviv, operations management .

Keywords: government subsidies; green technology adoption; newsvendor; cost of uncertainty; supply chain coordination (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (126)

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