Competitive analysis of R&D investment with R&D budget constraint and R&D uncertainty

This paper examines the cost-reducing research and development (R&D) competition of duopolistic firms with consideration of R&D budget constraint and R&D uncertainty through constructing a game-theoretic game. We find the R&D success probability decreases each firm's expected profit when this probability remains high because it intensifies R&D competition too much in this scenario. We show each firm suffers from an increase in R&D budget when such budget is moderate due to the intensified R&D competition as well. Furthermore, we reveal output subsidy leads to a higher expected total subsidy cost and a higher expected social welfare than R&D subsidy.