Subsidies for sustainable production: Effects of changing subsidy level

Report, 2005

A multi-trial duopoly price-setting game was used to investigate the potential ef-fectiveness of a subsidy system aimed at reducing sales and thereby production of environmentally harmful products. In real life it is however likely that a subsidy level will never remain fixed, either nominally or in real value. Producers may also have unreliable perceptions of the subsidy level even if it does not change. Therefore, a subsidy, either fixed and known, varying randomly, or varying sys-tematically across trials, was investigated. The results showed that both fixed and known, as well as varying subsidy levels led to higher prices and thus re-duced sales compared to without a subsidy. Knowledge of a fixed subsidy level or expectations about a subsidy level based on previous trials, appeared to make participants refrain from setting lower prices than the subsidy level. Further-more, the results indicated that participants attempted to maximize their profit by selling to the lowest price, thus they stayed competitive and did not exploit the subsidy.