Regulating food risk management—a government–manufacturer game facing endogenous consumer demand

In the food industry, manufacturers may add some chemical additives to augment the appearance or taste of food. This may increase the food demand and sales profits, but may also cause health problems to consumers. The government could use a punishment policy to regulate and deter such risky behavior but could also benefit from economic prosperity and tax income based on their revenues. This generates a tradeoff for the government to balance tax income, punishment income, and health risks. Adapting to government regulations, the manufacturers choose the level of chemical additives, which impacts the consumer demand. To our knowledge, no prior work has studied the strategic interactions of regulating the government and the manufacturers, faced with strategic customers. This paper fills this gap by (a) building a government-manufacturer model and comparing the corresponding decentralized and centralized models; and (b) applying the 2008 Sanlu food contamination data to validate and illustrate the models.