Incentives for Cost Reducing Innovations Under Quantitative Import Restraints

  • Célia Costa Cabral
  • Praveen Kujal
  • Emmanuel Petrakis


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.


Free Trade Foreign Firm Consumer Surplus Domestic Firm Price Competition 
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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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