Subsidy Wars for Market Share: When and How Much to Subsidize?

Abstract

Nownadays, many subsidy wars for market share have broken out among firms, especially in markets with network effects. Although such subsidy wars are common and costly, there is a lack of research on firm subsidy strategies. We discuss the subsidy competition in a duopoly market where the entrant enters the market by subsidizing consumers, and the incumbent follows by setting its subsidy to maximize its competitive advantage in unit or total subsidy and simultaneous maintain its market dominance. We show that the incumbent can always find an optimal and fixed market point to subsidize when the competitive advantage in unit subsidy is considered. If the competitive advantage in total subsidy is considered, the optimal market point that the incumbent start to subsidize increases with the entrant’s investment. The incumbent cannot keep its advantage in market share with less total subsidy when the total subsidy of the entrant exceeds a threshold. Our results are robust when products are differentiated horizontally and vertically.