Subsidizing the Distribution Channel: Donor Funding to Improve the Availability of Products with Positive Externalities

January 2011 Abstract Large populations in the developing world lack adequate access to products, such as essential medicines, whose use confers positive externalities. Because of the critical role played by the privatesector distribution channel, donors (e.g., the Global Fund) are beginning to devote substantial resources to fund subsidies that encourage the channel to improve the availability of these products. A key question for a donor is whether it should subsidize the purchases or sales of the private channel. We find the answer depends crucially on whether consumers are homogeneous or heterogeneous in their valuation of the product. For the case of heterogeneous consumers’ valuations, we provide evidence that subsidizing sales leads to greater expected donor utility, consumption, and social welfare. When consumers’ valuations are homogeneous, we establish the opposite conclusion: subsidizing purchases leads to greater expected donor utility, consumption, and social welfare.