A Duality Between Cost-Reducing R&D versus Quality-Improving R&D and Welfare Analysis in a Hotelling Model

Chia-Hung Sun ()

Atlantic Economic Journal, 2013, vol. 41, issue 2, 133-148

Abstract: Two versions of research and development (R&D) activities in a Hotelling model with endogenous spillover effect, one with cost-reducing R&D and the other with quality-improving R&D, are analyzed in this paper. The result points out that two such kinds of R&D activities will share identical strategic properties, and that we shall be able to derive the equilibrium strategies of a quality-improving R&D model from those of a cost-reducing R&D model, and vice versa. It is found that the special market demand in a Hotelling model in fact plays a crucial role as well. This paper also provides a welfare analysis, the results of which show that government intervention via taxing the locations and subsidizing R&D efforts can remedy the market failure resulting from excess differentiation on locations and under-investment on R&D expenditures in non-cooperative equilibrium. Copyright International Atlantic Economic Society 2013

Keywords: Endogenous spillovers; Cost-reducing R&D; Quality-improving R&D; Location; Fiscal regime; L13; O30; O38; R10 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11293-012-9349-8

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