DP16033 The Welfare Effect of a Consumer Subsidy with Price Ceilings: The Case of Chinese Cell Phones

Author(s): Ying Fan, Ge Zhang
Publication Date: April 2021
Keyword(s): cell phone, competition for eligibility, Price ceiling, Subsidy
JEL(s): D4, H2, L1
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16033

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.