Strategic R&D policy under vertically differentiated oligopoly

In this paper strategic R&D policy is analysed, where a firm and a firm compete in a third country with vertically differentiated ( and ) products. If the product market is under price competition, the high-tech (low-tech) firm's government has an incentive to tax (subsidize) its domestic firm's activities. If the product market is under quantity competition, the results are opposite: an R&D subsidy (tax) incentive for the high-tech (low-tech) firm's government; and the high-tech firm's government in the R&D policy game, in contrast to the standard prisoner's dilemma result of the R&D policy literature.