Strategic policy for product R&D with symmetric costs

In this paper I examine strategic policy for product R&D in an international duopoly where domestic and foreign firms are identical. It is shown that strategic R&D policy is described by a subsidy schedule contingent on firms' quality choices. Unilateral policy enables its domestic firm to produce a high-quality product, making equilibrium outcome unique. With two active governments, in equilibrium they implement different subsidy schedules. Two equilibrium outcomes exist, which are identical except for the identity of the countries. Thus, both countries have an equal chance to become the high-quality exporter. Both Bertrand and Cournot cases are examined.