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R&D Policy Competition with Process Innovation in a Multi-Product Duopoly

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  • Stephen Jui-Hsien Chou

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    (Department of Economics, National Tsing Hua University, Taiwan)

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    Abstract

    This paper considers a reciprocal dumping model which consists of two countries, each owning a multi-product firm which sells products to both countries. The firms choose the R&D investment portfolio for their products, and a government may subsidize or tax its domestic firm for the R&D investment. It is shown that a firm invests more in R&D for its core (non-core) product if products are sufficiently differentiated (similar) to each other. Moreover, if a firm invests more in its non-core product than its core product, it does that to an extent such that the non-core product becomes the core product after the R&D process. Policy competition results in a unilateral incentive of a subsidy, and the stable optimal policy is always a subsidy. When two governments harmonize their policies, it is optimal for them to set subsidies to zero. The optimal subsidy in a duopoly is higher than that in a monopoly if and only if two governments' policies are strategic substitutes.

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    File URL: http://www.bapress.ca/ref/v3-4/1923-7529-2013-04-53-24.pdf
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    Bibliographic Info

    Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

    Volume (Year): 3 (2013)
    Issue (Month): (November)
    Pages: 53-76

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    Handle: RePEc:bap:journl:130404

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    Related research

    Keywords: Process innovation; Subsidy; Multiproduct firm; Trade;

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    1. Haaland, Jan I. & Kind, Hans Jarle, 2004. "R&D Policies, Trade and Process Innovation," CEPR Discussion Papers 4784, C.E.P.R. Discussion Papers.
    2. Spencer, Barbara J & Brander, James A, 1983. "International R & D Rivalry and Industrial Strategy," Review of Economic Studies, Wiley Blackwell, vol. 50(4), pages 707-22, October.
    3. Leahy, Dermot & Neary, J Peter, 2007. "Multilateral Subsidy Games," CEPR Discussion Papers 6479, C.E.P.R. Discussion Papers.
    4. Leahy, Dermot & Neary, J Peter, 1998. "Strategic Trade and Industrial Policy Towards Dynamic Oligopolies," CEPR Discussion Papers 1968, C.E.P.R. Discussion Papers.
    5. Bagwell, Kyle & Staiger, Robert W., 1994. "The sensitivity of strategic and corrective R&D policy in oligopolistic industries," Journal of International Economics, Elsevier, vol. 36(1-2), pages 133-150, February.
    6. Dermot Leahy & J. Peter Neary, 2000. "Robust Rules for Industrial Policy in open Economies," Working Papers 200021, School Of Economics, University College Dublin.
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