Subsidy Policies for Product Quality Improvement in Direct Selling

The extant related reports and events have shown that product quality issue becomes the priority among priorities in food and pharmaceutical industries since food and drug safety are closely related to people’s life and health. This paper provides a game-theoretic model to investigate the interplay between a policy maker, a manufacturer and a group of consumers, in which the policy maker determines the subsidy strategy to compensate the manufacturer in order to improve product quality. We take the product quality, social welfare, manufacturer’s utility, consumer surplus as hierarchical optimization objectives respectively. Our results reveal that a combo subsidy is the optimal choice to improve product quality. Importantly, we find that the optimal strategies for different players are distinct. We show that the policy maker should always provide a comb of subsidy regardless of external factors, while per-unit cost subsidy and quality improvement subsidy both can outperform the other in certain conditions. Our results show that the manufacturer always prefers the per-unit cost subsidy, while the comparison of the other two strategies depends on the product market share and production cost. We also find that consumers are indifferent to a combo of subsidy and per-unit cost subsidy, but the quality improvement subsidy always performs the worst.