Product R&D Investment Policies in an International Duopoly

Abstract

This study analyzes the optimal product R&D investment policies of a developed and a developing country in an international Cournot duopoly where firms from these two countries compete through endogenous quality-quantity decisions. We explore a new international trade model by using demand functions derived from utility functions. We find that the optimal product R&D investment policies for both countries are subsidies. This study counters a finding that used Hotelling-type demand functions and it partially modifies another result that adopted the same demand functions but with an international Bertrand duopoly.

Optimal Product R&D Policies with Endogenous Quality Choices and Unilateral Spillover

“…The works of Ishii (2014), Toshimitsu (2014) and Taba and Ishii (2014), among others who employ the horizontal and vertical differentiation model, have similarities with our study. They assume a similar utility function and the same setting for the model, namely, the three-stage international duopoly model provided by Spencer and Brander (1983) with endogenous quality choices, as mentioned above.…”

“…The optimal product R&D policies in the absence of spillover under the Cournot competition are analyzed in Taba and Ishii (2014) in the similar model setting. They use general quality functions and assume constant production costs.…”

“…However, both authors consider only the case of Bertrandprice competition. Taba and Ishii (2014) analyze non-cooperative R&D policy in the absence of spillover under Cournot competition and show that the optimal policies of both countries are subsidies.…”

“…Another category of papers uses a horizontal and vertical product differentiation model (Ishii 2014;Toshimitsu 2014;Taba and Ishii 2014). 1 The present study is based on this model.…”

Industrial Policy and Firm’s R&D Choice under Process and Product R&D

“…Together, these studies posit that different policies are chosen depending on the mode of competition. Further, studies using horizontal and vertically differentiated models, such as those by Ishii (2014), Toshimitsu (2014), Taba and Ishii (2016), and Taba (2016), result in qualitatively similar outcomes. This implies that the respective governments of horizontally and verticallydifferentiated firms have incentives to subsidize.…”