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Incentives for cost reducing innovations under quantitative import restraints

Celia Cabral (), Praveen Kujal () and Emmanuel Petrakis ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: The effect of quotas on fmns' incentive to invest in cost-reducing R&D is studied in a two-stage price-setting duopoly. A domestic and a foreign firm choose initially R&D efforts and then set the prices of their differentiated products in the domestic market. With a quota imposed at, or close to, the free-trade level of imports, the domestic fmn faces less competition than under free-trade and chooses to invest less in R&D. Contrarily, the constrained foreign fmn invests more in R&D as the negative strategic effect of a reduction in its cost is now absent. These results differ from the Coumot duopoly case in which R&D expenditures are lower for both fmns. We also show that as the quota becomes more restrictive, the domestic fmn increases and the foreign fmn decreases its expenditures in R&D. Finally, we show that domestic welfare is a1ways higher under free-trade than under any quota regardless of the degree of product substitutability.

Keywords: Cost; Reduction; Investment; Import; Quotas; Bertrand; Competition (search for similar items in EconPapers)
Date: 1996-10
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Journal Article: Incentives for Cost Reducing Innovations under Quantitative Import Restraints (1998) Downloads
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