R&D subsidies under asymmetric cournot competition

Abstract

With a three-stage game model, this article theoretically assesses the effectiveness of different research and development subsidy strategies under asymmetric duopoly. The findings indicate that subsidising the small firm instead of the large is the optimum for the maximisation of social welfare in general. Meanwhile, if the initial marginal costs of the two firms are close to each other, providing subsidies to the small firm leads to more social R&D investment and higher aggregate production, but lower consumer surplus. Conversely, while the cost gap of the duopoly is large, subsidising the big firm becomes the preferable option for the authority to stimulate both R&D investment and total output of the industry, while sacrificing consumer surplus.