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.