Cost reduction collaboration between firm and social planner: An economic analysis

Abstract Recently, firms like Toyota and social planners like the Government of India have invested in various initiatives leading to the firm's cost reduction. Further, such cost reduction collaborations also benefit the social planner because of higher industry output, and therefore, higher employment opportunities. In this paper, we investigate different scenarios in which the firm, or the social planner, or both exert efforts to reduce the firm's manufacturing cost. Interestingly, we find that under certain conditions, the firm may exert lower effort than the social planner. Our analysis reveals that when both players' cost reduction effectiveness is low, then collaboration results in higher payoffs for both the players. However, when the effectiveness of any player is high, then both players are better off if only one of them exerts effort. Our study further reveals that collaboration between the social planner and the firm always leads to a win–win situation.