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Optimal Policy For Product R&D With Endogenous Quality Ordering: Asymmetric Duopoly

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  • NAOTO JINJI
  • TSUYOSHI TOSHIMITSU

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 demonstrate the possible anti‐leapfrogging effect of R&D subsidy/tax policy. By committing to a firm‐specific subsidy schedule contingent on firms’ quality choices, the government can not only correct distortions in product quality but also select the socially preferred equilibrium. The latter role is fulfilled by preventing the technologically inferior firm from becoming a quality leader in the industry. Both Bertrand and Cournot cases are analysed.

Suggested Citation

  • Naoto Jinji & Tsuyoshi Toshimitsu, 2006. "Optimal Policy For Product R&D With Endogenous Quality Ordering: Asymmetric Duopoly," Australian Economic Papers, Wiley Blackwell, vol. 45(2), pages 127-140, June.
    • Handle: RePEc:bla:ausecp:v:45:y:2006:i:2:p:127-140
    DOI: 10.1111/j.1467-8454.2006.00282.x
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    Cited by:

    1. Jannett Highfill & Michael McAsey, 2018. "Product Reliability, R&D, and Manufacturing Cost Shocks," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(1), pages 27-42, March.
    2. Yasunori Ishii, 2017. "International asymmetric R&D rivalry and industrial strategy," Journal of Economics, Springer, vol. 122(3), pages 267-278, November.
    3. Yumiko Taba & Yasunori Ishii, 2016. "Product R&D Investment Policies in an International Duopoly," Review of Development Economics, Wiley Blackwell, vol. 20(2), pages 574-582, May.
    4. Taba Yumiko, 2016. "Optimal Product R&D Policies with Endogenous Quality Choices and Unilateral Spillover," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(1), pages 365-391, January.
    5. Julien Berthoumieu & Viola Lamani, 2016. "Vertical Differentiation, Uncertainty, Product R&D and Policy Instruments in a North-South Duopoly," Working Papers hal-01285559, HAL.
    6. Ram Kumar Phuyal, 2016. "Imposition of R&D Subsidy in a Product Differentiated Duopolistic Industry," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(6), pages 336-351, June.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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