OPTIMAL POLICY FOR PRODUCT R&D WITH ENDOGENOUS QUALITY ORDERING: ASYMMETRIC DUOPOLY*

Abstract

We examine the optimal R&D subsidy/tax policy under a vertically differentiated duopoly. In a significant departure from the existing work, we consider the case of asymmetric costs of product R&D where there is a small technology gap between firms. In our analysis, the endogeneity of quality ordering is explicitly taken into account. We show that the optimal policy is described by a firmspecific subsidy schedule that is contingent on firms' quality choices. The subsidy schedule not only corrects the distortion in product quality but also selects the socially preferred equilibrium. Both Bertrand and Cournot cases are analyzed.

Product R&D Investment Policies in an International Duopoly

“…Park () presented an interesting but curious proposition, that is, while the optimal product R&D investment policy of the developed (developing) country is a subsidy (tax) when the industry is under Cournot quality–quantity competition, the opposite policies are optimal if the industry is under Bertrand quality–price competition (for other arguments regarding product R&D policies, see Zhou et al. () and Jinji and Toshimitsu (), for example).…”

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

“…Kim and Gu (2015) examine the impact of market size difference on government R&D policies and conclude that a country with a large (small) market size and lower (higher) product differentiation decreases (increases) the level of optimal R&D subsidy. Studies concerning product R&D, such as those by Park (2001), Zhou et al (2002), Jinji (2003), and Jinji and Toshimitsu (2006) apply Hotelling vertically differentiated models. Together, these studies posit that different policies are chosen depending on the mode of competition.…”

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

“…Jinji (2003) develops the analysis under endogenous quality ordering and symmetric R&D costs. Jinji and Toshimitsu (2006) expand it with a small technology gap and asymmetric R&D costs. Toshimitsu and Jinji (2008) extend the work of Zhou et al(2002) by assuming asymmetric marginal production costs and show that the results obtained in previous papers may be reversed.…”

“…Previous papers can be divided into two categories based on the models they used. One employs the traditional Hotelling vertically differentiated model; this is analyzed by Park (2001), Zhou et al (2002), Jinji (2003), Jinji and Toshimitsu (2006), and others. These previous analyses derive almost the same results as those discussed below, and the results depend on the mode of competition.…”