We investigate an automobile supply chain where a manufacturer and a retailer serve a market with a fuel-efficient automobile under a scrappage program by the government. The program awards a subsidy to each consumer who trades in his or her used automobile with a new fuel-efficient automobile, if the manufacturer’s suggested retail price (MSRP) for the new one does not exceed a cutoff level. We derive the conditions assuring that the manufacturer has an incentive to qualify for the program, and find that when the cutoff level is low, the manufacturer may be unwilling to qualify for the program even if the subsidy is high. We also show that when the manufacturer qualifies for the program, increasing the MSRP cutoff level would raise the manufacturer’s expected profit but may decrease the expected sales. A moderate cutoff level can maximize the effectiveness of the program in stimulating the sales of fuel-efficient automobiles, whereas a sufficiently high cutoff level can result in the largest profit for the manufacturer. The retailer’s profit always increases when the manufacturer chooses to qualify for the program. Furthermore, we compute the government’s optimal MSRP cutoff level and subsidy for a given sales target, and find that as the program budget increases, the government should raise the subsidy but reduce the MSRP cutoff level to maximize sales.
Bibliographical noteFor this research, the first author (Jian Huang) is supported by the National Natural Science Foundation of China under Grant Nos. 70901036, 71371089, 71390521, 71101067, the Jiangxi University of Finance and Economics’s Excellent Young Researcher Support Scheme under Grant No. 00252025, and National Center for International Joint Research on E-Business Information Processing under Grant 2013B01035. The second author (Mingming Leng) is supported by the General Research Fund of the Hong Kong Research Grants Council under Research Project No. LU341012. The third author (Liping Liang) is supported by the Research and Postgraduate Studies Committee of Lingnan University (Hong Kong) under Research Project No. DR11C2. The fourth author (Chunlin Luo) is supported by the National Natural Science Foundation of China under Grant No. 71362010.
- Supply chain management
- Government scrappage program
- Single period
HUANG, J., LENG, M., LIANG, L., & LUO, C. (2014). Qualifying for a government’s scrappage program to stimulate consumers’ trade-in transactions? Analysis of an automobile supply chain involving a manufacturer and a retailer. European Journal of Operational Research, 239(2), 363-376. https://doi.org/10.1016/j.ejor.2014.05.012