Optimal subsidies for development supply chains

Problem definition: When donors subsidize products for sale to low-income families, questions faced by the donor include who should be subsidized in the supply chain and to what extent, and whether retail competition, substitutable products, or demand uncertainty matter. Academic/practical relevance: By introducing and analyzing “development supply chains” in which transactions are commercial but subsidies are needed for affordability, we explore different supply chain structures, with product substitution and retail competition motivated by a field study in Haiti of supply chains of subsidized solar lanterns. Methodology: We incorporate product substitution, retail competition, and demand uncertainty in a three- echelon supply chain model with manufacturers, retailers and consumers. This model has transactions among the donor, manufacturers, retailers and consumers as a 4-stage Stackelberg game and we solve different variations of this game by using backward induction. Results: The donor can subsidize the manufacturer, retailer or the customer, as long as the total subsidy per unit across these echelons is at the optimal level. Having more product choice, especially with product- specific subsidies, and having more retail-channel choice can increase the number of beneficiaries adopting the products; this increase becomes more pronounced as demand becomes more uncertain. Managerial implications: Donors must coordinate across different programs along the entire supply chain; demand uncertainly only accentuates the need to do so. They must also encourage more retailers to enter the market, to sell a diverse set of substitutable products, and to offer product-specific subsidies