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The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones

Author

Listed:
  • Fan, Ying
  • Zhang, Ge

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

  • Fan, Ying & Zhang, Ge, 2021. "The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones," CEPR Discussion Papers 16033, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16033
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    Cited by:

    1. is not listed on IDEAS
    2. Lohawala, Nafisa, 2023. "Roadblock or Accelerator? The Effect of Electric Vehicle Subsidy Elimination," RFF Working Paper Series 23-13, Resources for the Future.
    3. Markkanen, Jaakko, 2024. "Passthrough of Retail Price Regulation in the Market for Pharmaceuticals," ETLA Working Papers 123, The Research Institute of the Finnish Economy.
    4. Mariko WATANABE, 2025. "Industrial Policy and International Commercial Rules: How to deal with China’s overcapacity phenomenon (Japanese)," Discussion Papers (Japanese) 25003, Research Institute of Economy, Trade and Industry (RIETI).
    5. Mariko WATANABE & Kensuke KUBO, 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).

    More about this item

    Keywords

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    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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