Subsidizing purchases of public interest products: A duopoly analysis under a subsidy scheme

Abstract

We investigate a symmetric duopoly setting in which two manufacturers produce the traditional and public interest (PI) products under a government’s subsidy scheme. A higher subsidy can increase the sale of the PI product but reduce the sale of the traditional product. Then, we study an asymmetric setting in which a manufacturer produces one of the two products and the other manufacturer produces both products. The government’s optimal subsidy is increasing in the marginal externality of the PI product.