Abstract: Aiming at the contradiction between government subsidy and manufacturer emission reduction investment, the paper builds game model of government and duopoly manufacturers under three scenarios: the manufacturers without subsidies (Scenario NS)，subsidy to emission reduction investment (Scenario IS) and subsidy to the quantity (Scenario QS), to discuss manufacturers′ quantity and investment strategies and compare the differences between profits and social welfare in different subsidy scenarios. The research finds that government subsidies could improve both manufacturers′ profit and social welfare effectively, the optimal subsidy-rate under IS scenario is positively related to technology spillovers, while they show a U-shaped relationship under QS scenario, but optimal subsidy rate is negatively related to product differentiation under any subsidy strategy. The above conclusions provide the theoretical basis for the government subsidy policy, and also provide the countermeasures for the enterprises to emission reduction investment.

Key words: duopolistic market, optimal strategy, government subsidy, emission reduction investment