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Donor Product-Subsidies to Increase Consumption: Implications of Consumer Awareness and Profit-Maximizing Intermediaries Terry A. Taylor and Wenqiang Xiao Haas School of Business, University of California, Berkeley Stern School of Business, New York University September 2014 Abstract Increasingly, donors that subsidize socially-desirable products in the developing world are shift- ing from distributing through non-commercial to commercial channels, ceding control of the product price to for-profit intermediaries. This paper advises a donor as to how the donor’s loss of price con- trol and the level of consumer awareness–defined as the fraction of the consumer population that is informed of the product’s benefits–influence the donor’s optimal subsidy and utility: First, in shifting to the commercial channel, the donor should increase (decrease) the subsidy when consumer awareness is low (high). Second, with the commercial channel, the donor should be prepared to increase the subsidy as awareness increases, which is contrary to her actions with a non-commercial channel. Third, contrary to the lesson obtained with non-commercial distribution, with commer- cial distribution the donor can be hurt by increased awareness. This occurs when awareness is moderate, and the implication is that then the donor should be wary of encouraging entities (e.g., governments, non-governmental organizations) to institute campaigns that increase the awareness of the product’s benefits. The intermediary’s decision of whether to target either only informed consumers or the broad market drives our results. Introduction Donors fund subsidies to lower the price, and hence increase the purchase and use, of socially- beneficial products in the developing world. For example, malaria is estimated to cause more than 200 million illnesses and 600,000 deaths annually (World Health Organization 2013). Because the recommended drugs to treat malaria, artemisinin combination therapies (ACTs), are expensive to produce, they are unaffordable to many in sub-Saharan Africa, the region which bears the heaviest burden of malaria (Morris et al. 2014). Historically, donor efforts to lower the cost of malaria drugs have focused on non-commercial channels, such as public health systems. In recent years, donors have shifted their efforts in subsidizing recommended malaria drugs to commercial channels,