This paper discusses the impact of government subsidy on the supply chain performance. We consider a model where a manufacturer supplies a product through a single retailer with a constant price elasticity, and the government offers a price subsidy for each product to reduce the real price for the consumers, so as to promote the demand. We show that the retailer makes a further price cut as the subsidy is offered, and both the two parties of the channel benefit equally from this policy. The best subsidy that the government can offer is analyzed, given the budget constrain. We further show that the government subsidy can not help to achieve the supply chain coordination.
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