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The welfare effect of a consumer subsidy with price ceilings: the case of Chinese cell phones

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  • Ying Fan
  • Ge Zhang

Abstract

Subsidies to consumers may cause firms to charge higher prices, which offsets consumer benefits from subsidies. We study a subsidy program design that mitigates such price increases by making products' eligibility for a subsidy dependent on firms' commitment to price ceilings. To quantify the importance of such competition for eligibility, we develop a structural model and an estimation procedure that accommodate binding pricing constraints. We find that competition for eligibility mitigates the price increases arising from the subsidy and even leads to a reduction in prices for some products. It improves consumer and total surpluses while limiting government subsidy payments.

Suggested Citation

  • Ying Fan & Ge Zhang, 2022. "The welfare effect of a consumer subsidy with price ceilings: the case of Chinese cell phones," RAND Journal of Economics, RAND Corporation, vol. 53(2), pages 429-449, June.
  • Handle: RePEc:bla:randje:v:53:y:2022:i:2:p:429-449
    DOI: 10.1111/1756-2171.12413
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    References listed on IDEAS

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    Cited by:

    1. WATANABE Mariko & KUBO Kensuke, 2024. "The Welfare Effects of Government Intervention into the Licensing of Standard-essential Patents: An analysis of the Chinese smartphone and SoC markets," Discussion papers 24042, Research Institute of Economy, Trade and Industry (RIETI).
    2. Lohawala, Nafisa, 2023. "Roadblock or Accelerator? The Effect of Electric Vehicle Subsidy Elimination," RFF Working Paper Series 23-13, Resources for the Future.

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    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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