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Articles

Strategic R&D policy under multiproduct duopoly and quality-price competition

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ABSTRACT

This paper analyses strategic R&D policy in a third-country trade model where multiproduct firms with different production technologies compete in a vertically differentiated market. I show that the optimal R&D policies for both countries are subsidies when the product market is under price competition.

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Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 According to the study on US firms by Bernard et al. (Citation2007), 57.8% of exporting firms produce multiple products, and 99.6% of export value can be accounted for by multiproduct firms in the year 2000.

2 Similarly, Eckel and Neary (Citation2010) name the core competence variety which incurs the lowest marginal cost.

3 Following Park (Citation2001), asymmetry in the R&D cost functions can be adopted in such a way that IH(a)=g×IL(a) with a large enough g > 1. According to Park (Citation2001), these types of cost functions ensure the uniqueness and stability of the equilibrium.

4 The price equilibrium is similar to Eaton 1994. See footnote 6 in Eaton and SchmittCitation1994.

5 In theory, both firms can produce and sell the product with quality qˆ. For convenience, I assume the low-tech firm supplies this product. Because the profit on the product is zero, our results do not depend on the assumption.

6 I have already shown that consumer t[0,qˆ] will purchase the products produced by the low-tech firm. Notice that u(t,q)q=tαq is decreasing in q[0,qˆ] but always positive for any t(αqˆ,qˆ]. Therefore, consumer t(αqˆ,qˆ] will maximize his or her utility by purchasing good with qˆ.

7 The second-order conditions are as follows: 2ΠHaH2=qˆaH(1sH)2IHaH2 < 0.

8 Wi(si,sj) is assumed to be concave in si to satisfy the second-order conditions. The reader is referred to Park Citation2001 pp. 974–975 for further detailed derivation.

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