The welfare effect of a consumer subsidy with price ceilings: the case of Chinese cell phones

Subsidies to consumers may cause firms charge higher prices, which offsets consumer benefits from subsidies. We study a subsidy program design that mitigates such price increases by making products' eligibility for dependent on firms' commitment ceilings. To quantify the importance of competition eligibility, we develop structural model and an estimation procedure accommodate binding pricing constraints. find arising even leads reduction in prices some products. It improves total surpluses while limiting government payments.