Donor Product‐Subsidies to Increase Consumption: Implications of Consumer Awareness and Profit‐Maximizing Intermediaries

Abstract

Increasingly, donors that subsidize socially‐desirable products in the developing world are shifting from distributing through non‐commercial to commercial channels, ceding control of the product price to for‐profit intermediaries. This study advises a donor as to how the donor’s loss of price control and the level of consumer awareness—defined as the fraction of the consumer population that is informed of the product’s benefits—influence the donor’s optimal subsidy and utility: First, in shifting to the commercial channel, the donor should increase (decrease) the subsidy when consumer awareness is low (high). Second, with the commercial channel, the donor should be prepared to increase the subsidy as awareness increases, which is contrary to her actions with a non‐commercial channel. Third, contrary to the lesson obtained with non‐commercial distribution, with commercial distribution the donor can be hurt by increased awareness. This occurs when awareness is moderate. The implication is that a donor that operates in such a setting should be wary in encouraging entities (e.g., governments, non‐governmental organizations) to institute campaigns that increase the awareness of the product’s benefits. The intermediary’s decision of whether to target either only informed consumers or the broad market drives our results.

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