Optimal Product R&D Policies with Endogenous Quality Choices and Unilateral Spillover

This study derives non-cooperative and cooperative optimal product research and development (R&D) policies of a country with a high-quality firm and a country with a low-quality firm in the presence of technology spillover under Cournot and Bertrand competitions in an international duopoly. When the respective governments determine their R&D policies non-cooperatively, optimal policies for both countries involve an R&D tax (subsidy) if spillover is large (small). When the governments choose their R&D policies cooperatively, a tax is always optimal for the country with low-quality firm and a subsidy (tax) is optimal for the country with high-quality firm if spillover is large (small). In addition, we show that the non-cooperative optimal product R&D Policy is tax for a wider range of spillover effects under Cournot competition, compared to the case of Bertrand competition.