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Discussion Paper Details

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Full Details

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

Author(s): Ying Fan and Ge Zhang

Publication Date: April 2021

Keyword(s): cell phone, competition for eligibility, Price ceiling and Subsidy

Programme Area(s): Industrial Organization

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16033

Bibliographic Reference

Fan, Y and Zhang, G. 2021. 'The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16033