How to eliminate the uncovered market: A duopoly model with government intervention

Abstract

To eliminate poverty, government intervention is critical for addressing uncovered markets. To assess how this can be done effectively, this study constructs a two‐firm model with government intervention. The study focuses on the preconditions, methods, and effects of different government intervention strategies. There are three main findings. (1) When consumer income levels fall below a certain threshold, an uncovered market segment is created, and government intervention should be introduced. (2) Government intervention strategies can be divided into subsidy‐type, production‐type and mixed‐type, and each type achieves a different level of consumer surplus. Given a level of consumer surplus, the optimal strategy is affected by production costs. (3) For production‐type and mixed‐type intervention strategies, when the market is covered, lower intervention costs can achieve higher consumer surplus if government production costs are low. Furthermore, the optimal subsidy‐type intervention strategy varies with the changes in product quality if relaxing the precondition of market coverage.