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Vertical Differentiation, Uncertainty, Product R&D and Policy Instruments in a North-South Duopoly

Author

Listed:
  • Julien Berthoumieu

    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux)

  • Viola Lamani

    (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux)

Abstract

This paper analyzes the impact of several trade policy instruments on product Research and Development (R&D) investment in a North-South duopoly where a Northern firm competes in prices with a Southern firm on both markets. The Northern firm invests in product R&D owing to a competitive disadvantage compared to the Southern firm which benefits from a lower labor cost. The outcome of the R&D activity is uncertain. If successful, vertical differentiation occurs in both markets. The Northern country's government is the only one policy active and may implement the following trade policy instruments: an import tariff, a production subsidy, an R&D subsidy, a standard of quality, a minimum-price, and an import quota. The results show that the Northern firm's R&D expenditures increase with each policy instrument except for the import quota. The paper also provides a welfare analysis in order to verify whether or not the Northern government is encouraged to implement these policy instruments.

Suggested Citation

  • Julien Berthoumieu & Viola Lamani, 2016. "Vertical Differentiation, Uncertainty, Product R&D and Policy Instruments in a North-South Duopoly," Working Papers hal-01285559, HAL.
    • Handle: RePEc:hal:wpaper:hal-01285559
    Note: View the original document on HAL open archive server: https://hal.science/hal-01285559
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    References listed on IDEAS

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    Keywords

    Trade Policy Instruments; Product Research and Development; North-South Duopoly; Vertical Differentiation.;
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