Trade Policy and Incentives for Cost Reduction in a Differentiated Industry: Price Vs. Quantity Competition

Abstract

The incentives for governments to impose subsidies and tariffs on R&D and output is analysed in a differentiated good industry where firms invest in a cost saving technology. When government commitment is credible, subsidies to R&D and output are positive both under Bertrand and Cournot competition. However, if the government cannot commit to a policy action, it chooses a tariff under Bertrand competition and a subsidy under Cournot competition. ; N/A