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Incentives for Cost Reducing Innovations Under Quantitative Import Restraints

  • Célia Costa Cabral
  • Praveen Kujal
  • Emmanuel Petrakis
Chapter

Abstract

The effect of trade quotas on firms’ incentive to invest in cost-reducing R&D is studied in a two-stage price-setting duopoly game. A domestic and a foreign firm first choose R&D levels and then set the prices of their differentiated products in the domestic market. With a quota imposed at, or close to, the free-trade level of imports, the domestic firm faces less competition than under free-trade and invests less in R&D. Contrarily, the constrained foreign firm invests more in R&D as the negative strategic effect of a reduction in its cost is now absent. These results differ partially from the Cournot duopoly case in which R&D expenditures are lower for both the firms. As the quota becomes more restrictive, the domestic firm increases and the foreign firm decreases its expenditures on R&D. Domestic welfare is always higher under free-trade than under any quota regardless of the degree of product substitutability.

Keywords

Free Trade Foreign Firm Consumer Surplus Domestic Firm Price Competition 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Science+Business Media Dordrecht 2000

Authors and Affiliations

  • Célia Costa Cabral
    • 1
  • Praveen Kujal
    • 2
  • Emmanuel Petrakis
    • 2
  1. 1.Universidade Nova de LisboaPortugal
  2. 2.Universidad Carlos III de MadridSpain

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