State aid in government procurement

We build a government procurement model in the context of international trade to generate two kinds of equilibrium outcomes, where a higher participation cost foreign firm participates more aggressively in one kind, but less aggressively in another kind. However, the latter equilibrium disappears when the difference in the participation costs becomes sufficiently large. The first equilibrium is preferred by the government if its objective is to encourage domestic participation. It can eliminate the second equilibrium by either subsidising domestic firms or increasing participation costs for foreign firms, or both.