The Sensitivity of Strategic and Corrective R&D Policy in Battles for Monopoly

We characterize the strategic and corrective role for R&D subsidies in an export market where R&D is an uncertain process and where the winner of the R&D competition monopolizes the market. Investments in R&D are assumed to induce either first order or mean-preserving second order shifts in the distribution of (i) a firm's costs, with the low cost firm then monopolizing the product market or, under a reinterpretation of the model, (ii) a firm's discovery dates, with the first firm to make the discovery enjoying patent protection of infinite duration. We show that, regardless of which form uncertainty takes in the R&D process, a national strategic incentive to subsidize R&D exists, but must be balanced against a national corrective incentive to tax R&D whenever a country has more than one firm involved in the R&D competition. We conclude that an R&D subsidy is likely to be attractive in markets where scale economies are sufficiently large that firms battle for the eventual monopoly position, provided only that the number of domestic firms involved in the R&D stage is low.