Strategic R&D Policy.

This paper uses a natural extension of Lee and Wilde's (1980) model to show that the outcome of technological competition between firms (or countries) depends on the resolution of two forces: the profit incentive and the competitive threat. Using a duopoly model of a patent race, the paper illustrates that, by understanding the relative strength of these two forces, one can not only go a long way to understanding the outcome of these races, but also obtain crucial insights into the desirability of various R&D policies. The particular example considered in the paper is the subsidizing of R&D effort. Copyright 1989 by Royal Economic Society.