The Impact of Tariffs and Quotas on Strategic R & D Behavior

Tariffs and quotas are compared to assess their effects on firm behavior in a two-stage Cournot duopoly game, where R&D (or capital) is chosen initially and output is selected subsequently. In this quantity-setting game, the imposition of a quota may remove the possibility of a pure strategy equilibrium, leaving only a mixed strategy equilibrium. Under either potential equilibria, a quota leads to higher domestic profits than those obtained under a comparably restrictive tariff. However, both domestic R&D and output are relatively lower in a pure-strategy, cum-quota equilibrium. Two potential pure-strategy equilibria may result under apparently nonbinding quotas.