Abstract: Based on the perspective of product quality competition, we build a model with quasi-linear utility function which contains vertical differentiation and horizontal differentiation. With the function and the using of game theory, information economics, simulation deduction and numerical simulation, we conduct welfare analysis on the efficiency of government subsidy in the transition of national technology innovation strategy from the dimensions of sales variance and R&D externality. The conclusions of paper show that: First, in order to achieve the same level of social welfare effect, the cost of subsidies on products is higher than the cost of R&D subsidy. Moreover, the extra cost of subsides will transfer to firm's profits. Second, the U-shaped relationship between the subsidy efficiency and horizontal differentiation is verified and the welfare increase of subsidies on industries with high technology spillover is significantly higher than that on the industries with low technology spillover subsidies. Therefore, the government should implement different support and subsidy policies based on the different stages of the industry.

Key words: quality completion, technology spillovers, product differentiation, R&D subsidy