Comparison of the Optimal Policies on International Product R&D under Price and Quantity Competition

Abstract

Purpose - The first objective is to analyze and compare Bertrand and Cournot equilibria in a model wherein two governments compete with regard to research and development (R&D) subsidies, and two firms compete in a third-country market through product R&D investment and substitute goods. The second purpose is to compare the results derived in the presence of government intervention in international trade with those obtained in the case of no-trade and non-intervention.
 Design/Methodology/Approach - For this analysis, we extend Symeonidis’s (2003) work and develop an international R&D subsidy game consisting of three stages.
 Findings - First, the equilibrium levels of R&D expenditure, product quality, subsidies, prices, and firm profits are higher under quantity competition compared to price competition in the presence of government intervention in international trade, as in Symeonidis’s (2003) no-trade and non-intervention model. Second, the rankings of output and consumer surplus in the third country under the two competitions differ from those derived by Symeonidis (2003), who finds that they depend on the degree of horizontal differentiation and R&D spillovers. Third, the ranking of social welfare under the two regimes differs from the results of Symeonidis (2003), who establishes that the ranking of social welfare depends on the degree of horizontal differentiation and R&D spillovers.
 Research Implications - If a country is involved in international trade with substitute goods and its government faces R&D subsidy competition in the presence of product R&D spillovers, it is better for the government to provide R&D subsidies to domestic firms under quantity competition rather than those under price competition to ensure greater social welfare.