Optimal R & D Policy and Managerial Delegation Under Vertically Differentiated Duopoly

The paper investigates the optimal research and development ( R & D ) policy in a vertically differentiated market with managerial delegation. We consider not only discriminatory R & D policy but uniform R & D policy as well. It shows that R & D policy can vary depending on the regulator's objective: social welfare, consumer surplus or producer surplus; however, the outcomes are invariant to the nature of market competition. Undoubtedly, the relative‐performance contract plays a crucial role for elaborating policy effects. The government prefers discriminatory R & D policy to uniform policy under a consumer‐oriented objective. On the contrary, under a producer‐oriented objective, the government would prefer to choose uniform R & D policy rather than discriminatory policy.