Technology improvement strategy for green products under competition: The role of government subsidy

•A game model is applied to explore the firms’ technology improvement strategies.•The role of government subsidy is investigated in a competitive environment.•An asymmetric equilibrium arises if the cost and market expansion match each other.•Firms may trap into a prisoner’s dilemma which can be eased by government subsidy.•Government subsidy is not always beneficial from the perspective of firm’s profits. Nowadays, the growing global concerns about sustainable issues have placed high pressure on firms to improve production technology and reduce energy consumption. However, firm’s incentive may be weakened due to high costs. The government has recognized the firms’ predicament and provided financial support to incentivize them to improve technology. This study builds a game model which consists of a government and two competing firms to investigate the equilibrium solutions that the two symmetric firms can reach on their technology improvement strategies, and analyze the role of government subsidy. Results show that both firms apply the existing technology when it is obviously costly to improve technology, and both improve technology when the benefit of market expansion is relatively large, while they reach an asymmetric equilibrium with one improving technology and the other not when the cost and the market expansion associated with improving technology can match each other. Besides, the two firms may trap into a prisoner’s dilemma when they reach the equilibrium of both improving the technology. Encouragingly, government subsidy can serve as an effective way to alleviate the prisoner’s dilemma by easing firms’ financial burden for technology improvement. In addition, government subsidy is conducive to expanding the green product market and improving the social welfare. Finally, government subsidy may improve both firms’ profits except for the firm applying the existing technology in the asymmetric equilibrium when the cost of improving technology is moderate.