Design and analysis of government subsidies policy of capacity expansion under reselling and agency selling schemes

Abstract

Major disruptions, such as the coronavirus disease of 2019 (COVID-19) pandemic and the US-China trade war, have significantly impacted businesses and the global economy, creating a turbulent environment for society and supply chains. Globally, fighting disruptions and ensuring the supply of essential goods has become a significant challenge for governments. One possible solution is to strategically expand essential product capacity to increase supply resilience. Governments must cooperate closely with suppliers through carefully designed subsidy policies. A theoretical model based on current industry practices was built to explore and analyze the partnerships between governments and essential product suppliers. Our proposed model includes four players: the government, the supplier, the selling agent, and the consumer. We considered government subsidy policies for capacity expansion in building supply chains subject to two pricing designs: (1) government pricing and (2) market pricing. The results indicate that once a disruption occurs, social welfare increases with the government-subsidized expansion of essential goods to increase supply chain capacity. We analytically show that if the government does not support production expansion, the supplier can expand production only if the expansion cost is trivial. Furthermore, without government pricing, the product price increases in the government subsidy ratio. Hence, we conclude that government intervention is required to stabilize the market with proper price control, especially in the essential goods supply chain.