The sensitivity of strategic and corrective R&D policy in oligopolistic industries

Abstract

We evaluate the case for R&D subsidies in export sectors when the outcome of R&D is uncertain and the product market is oligopolistic. When R&D reduces expected costs in the particular sense of first-order stochastic dominance, a national strategic basis for R&D subsidies exists, whether firms choose prices or quantities. This must be balanced against a corrective incentive to tax R&D whenever the number of domestic firms exceeds one. However, when R&D increases the riskiness of the cost distribution as well, the results may switch: there emerges a strategic incentive to tax and a corrective incentive to subsidize R&D.