R&D subsidies in a duopoly market with outsourcing to the rival firm

Luciano Fanti, Domenico Buccella and Luca Gori ()

Bulletin of Economic Research, 2023, vol. 75, issue 1, 100-110

Abstract: This paper investigates the effects of a public uniform R&D subsidy policy in a downstream duopoly market in which a nonintegrated firm, which faces a lower marginal cost, outsources inputs from its vertically integrated rival. The findings show that, in this market structure, such a policy has relevant effects largely differentiated between downstream competitors, as it can significantly modify the relative market shares and profitability of competing firms. Unlike the standard Cournot setting augmented with R&D, results show that the subsidy policy can have different (counterintuitive) effects on R&D investments, output, and profits of the vertically integrated producer and the vertically separated firm, which hold in both cases of exogenous and endogenous (optimal) subsidy. Our findings offer some testable implications and suggest that a subsidy policy in a market with outsourcing to a rival should also consider the different effects of this approach on competitors.

Date: 2023
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https://doi.org/10.1111/boer.12342

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Working Paper: R&D subsidies in a duopoly market with outsourcing to the rival firm (2020)
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