Following Brander and Spencer 1983 and 1985, consider two countries denoted by i = X; Y , each ofwhich has…
Following Brander and Spencer 1983 and 1985, consider two countries denoted by i = X; Y , each of
which has one Â…rm producing a homogeneous product only for export, to be sold in the international
market. Both Â…rms compete a la Cournot in the international market. The inverse demand function
in the international market is P = 15 – 0:5Q. In addition, assume that the preinnovation unit cost
of each Â…rm is c = 4. Let ri denote the amount of R&D sponsored by the government in country i.
Assume that when the government i undertakes R&D at level ri, the unit production cost for the Â…rm
producing in country i is reduced to c-ri, i = X; Y . Â…nally, the total cost to government i of engaging
in R&D at level ri, is TC(ri) = (ri)sq/2 .
(a) Identify countriesÂ’best response function. [7 Points]
(b) What is the Nash equilibrium R&D level for each country? Discuss your results. [7 Points]
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