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The Sensitivity of Strategic and Corrective R&D Policy in Battles for Monopoly

  • Kyle Bagwell
  • Robert W. Staiger

We characterize the strategic and corrective role for R&D subsidies in an export market where R&D is an uncertain process and where the winner of the R&D competition monopolizes the market. Investments in R&D are assumed to induce either first order or mean-preserving second order shifts in the distribution of (i) a firm's costs, with the low cost firm then monopolizing the product market or, under a reinterpretation of the model, (ii) a firm's discovery dates, with the first firm to make the discovery enjoying patent protection of infinite duration. We show that, regardless of which form uncertainty takes in the R&D process, a national strategic incentive to subsidize R&D exists, but must be balanced against a national corrective incentive to tax R&D whenever a country has more than one firm involved in the R&D competition. We conclude that an R&D subsidy is likely to be attractive in markets where scale economies are sufficiently large that firms battle for the eventual monopoly position, provided only that the number of domestic firms involved in the R&D stage is low.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3235.

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Date of creation: Jan 1990
Date of revision:
Publication status: published as International Economic Review, November 1992
Handle: RePEc:nbr:nberwo:3235
Note: ITI IFM
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  1. Robert W. Staiger & Kyle Bagwell, 1990. "The Sensitivity of Strategic and Corrective R&D Policy in Oligopolistic Industries," NBER Working Papers 3236, National Bureau of Economic Research, Inc.
  2. Loury, Glenn C, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 395-410, August.
  3. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  4. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May.
  5. Hadar, Josef & Russell, William R, 1969. "Rules for Ordering Uncertain Prospects," American Economic Review, American Economic Association, vol. 59(1), pages 25-34, March.
  6. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  7. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  8. Avinash K. Dixit & Gene M. Grossman, 1984. "Targeted Export Promotion with Several Oligopolistic Industries," NBER Working Papers 1344, National Bureau of Economic Research, Inc.
  9. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
  10. Tor Klette & David de Meza, 1986. "Is the Market Biased Against Risky R&D?," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 133-139, Spring.
  11. Krishna, K. & Thursby, M., 1991. "Optimal Polocies with Strategic Distortions," Purdue University Economics Working Papers 1004, Purdue University, Department of Economics.
  12. Cheng, Leonard K, 1987. "Optimal Trade and Technology Policies: Dynamic Linkages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 757-76, October.
  13. Sudipto Bhattacharya & Dilip Mookherjee, 1986. "Portfolio Choice in Research and Development," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 594-605, Winter.
  14. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  15. Lee, Tom & Wilde, Louis L, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 429-36, March.
  16. Partha Dasgupta & Joseph Stiglitz, 1980. "Uncertainty, Industrial Structure, and the Speed of R&D," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 1-28, Spring.
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