Working Paper: CEPR ID: DP4090
Authors: Ralph Siebert
Abstract: This Paper analyses the impact of R&D subsidies on incumbent firms to introduce new goods. We are especially interested in investigating various consequences of government subsidies for R&D, provided to firms that offer products of different qualities. This study examines the incentives of incumbent firms to introduce new products of various quality, their prices, as well as the product variety offered on the market. We find that the innovator always introduces a new product of higher quality and withdraws the existing product from the market. Providing an R&D subsidy to a high-quality firm results in a new product with higher quality than an R&D subsidy provided to a low-quality firm, at the expense of all consumers paying higher prices for all goods in the market. When the R&D subsidy is small, the low quality firm may not introduce a new product into the market, given that R&D costs for quality improvement are high and the degree of product differentiation is small.
Keywords: Asymmetric firms; Innovation; New product introduction; Subsidies; Technology policy; Vertical product differentiation
JEL Codes: L11; L13; L52; O31; O32; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| R&D subsidies (O38) | new product introduction by incumbent firms (L15) |
| R&D subsidies (O38) | product quality (L15) |
| high-quality firm receiving R&D subsidy (L15) | higher quality new product (L15) |
| low-quality firm receiving R&D subsidy (L15) | new product introduction conditions (L15) |
| R&D subsidy size (O38) | low-quality firm product introduction (L15) |
| R&D subsidies to high-quality firms (O38) | higher industry quality and prices (L15) |
| R&D subsidies to low-quality firms (L15) | ambiguous effects (D91) |