Strategic Investment and Subsidies In An Asymmetric Duopoly

This paper analyzes the effect of revenue and investment subsidies on strategic in- vestment and optimal investment timing within an asymmetric duopoly, whereby two heterogeneous firms have different maximum capacities, marginal costs, and invest- ment costs. Within this market, a firm optimally decides whether to be a leader or a follower and the optimal quantity to produce. In addition, firms can be active or idle after investment. An interesting finding from our analysis is that the subsidies accelerate investment when a market has an incumbent firm and the other firm has the option to invest. When both firms have the option to invest, we observe differ- ent equilibria and investment triggers’ slopes as the revenue and investment subsidies change.