The Impact of R&D Subsidies on the Introduction of New Products by Incumbent Firms

Ralph Siebert

No 4090, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses the impact of R&D subsidies on incumbent firms to introduce new goods. We are especially interested in investigating various consequences of government subsidies for R&D, provided to firms that offer products of different qualities. This study examines the incentives of incumbent firms to introduce new products of various quality, their prices, as well as the product variety offered on the market. We find that the innovator always introduces a new product of higher quality and withdraws the existing product from the market. Providing an R&D subsidy to a high-quality firm results in a new product with higher quality than an R&D subsidy provided to a low-quality firm, at the expense of all consumers paying higher prices for all goods in the market. When the R&D subsidy is small, the low quality firm may not introduce a new product into the market, given that R&D costs for quality improvement are high and the degree of product differentiation is small.

Keywords: Innovation; Subsidies; Vertical product differentiation; Asymmetric firms; New product introduction; Technology policy (search for similar items in EconPapers)
JEL-codes: L11 L13 L52 O31 O32 O38 (search for similar items in EconPapers)
Date: 2003-10
New Economics Papers: this item is included in nep-ino and nep-tid
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