International Trade Policy towards Monopolies and Oligopolies

We study the effect of market structure upon international trade policy when firms invest in process R&D before competing in a differentiated goods market. For a domestic monopoly, and increasing the number of foreign firms, the government either chooses a R&D (and output) subsidy, or remains inactive. For a domestic duopoly a government taxes, subsidizes, or does not promote R&D depending upon the number of domestic firms and the degree of product differentiation. R&D (and output) is taxed for high levels of product differentiation. For lower levels of product differentiation only one country may subsidize in equilibrium. Further, the results are robust to Cournot or Bertrand competition.