Imposition of R&D Subsidy in a Product Differentiated Duopolistic Industry

Abstract

This study analyzes an imposition of government R&D investment subsidy in the standard model of vertical product differentiation with two products in a duopolistic competition. We show that the imposition of distinct subsidy to low quality firm increases its profit, but decreases the high quality firm’s profits, whereas subsidy to high quality firm increases both firms’ profits. It can be concluded that the subsidization effects of government are socially beneficial whether it is uniform or distinct R&D subsidy policies. Therefore, it can be suggested to the emerging economies that industrial transformation and enhancement of social welfare are possible at a given period of time through the best adoption of moderate R&D investments subsidy in the firms under vertical product differentiation setting.