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.
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 with a large enough . 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 . 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 will purchase the products produced by the low-tech firm. Notice that is decreasing in but always positive for any . Therefore, consumer will maximize his or her utility by purchasing good with .
7 The second-order conditions are as follows: .
8 is assumed to be concave in to satisfy the second-order conditions. The reader is referred to Park Citation2001 pp. 974–975 for further detailed derivation.