Temporary Subsidies, Irreversible Expansion, and Firm Exit in Asymmetric Markets

Abstract

Temporary production subsidies are used to promote competition in concentrated industries with persistent cost asymmetry. A common policy assumption is that short-run expansion by higher-cost firms will translate into durable competitive pressure once support is withdrawn. This paper shows why that implication need not hold. In a market where a low-cost incumbent disciplines prices both before and after intervention, a temporary marginal-cost subsidy can rationally induce a higher-cost firm to expand by incurring irreversible fixed costs, even though the subsidy does not improve its long-run competitive position. When the subsidy expires and marginal costs revert, unchanged price discipline combined with higher fixed obligations can render continued operation unprofitable, leading to exit. The analysis isolates a simple mechanism through which temporary subsidies can generate short-run competitive gains while reducing long-run firm viability. Although motivated by recent policy interventions in meatpacking, the mechanism applies more broadly to asymmetric markets in which cost advantages persist and expansion decisions are irreversible.