Technology Spillover and Product Quality

This dissertation studies how technology spillovers affect firms' choices of product quality in the presence of duopolistic interdependence in production and R&D. Firms develop product quality at first and compete in price at later. The literature shows that the spillovers strictly increase product quality for both firms. With the same settings, we introduce factors such as production cost, market characteristics, leadership and government policy in the model. In chapter 1, we show that the introduction of a significant production cost to the higher-end producer flips the sign of spillover effect on the higher-end producer to negative. In chapter 2, we examine similar issues in fully covered markets. We find that spillovers have no effect on qualities under zero production cost; spillovers have positive effect on the lower-end quality but negative effect on the higher-end quality; and spillover have positive effects on both qualities when the lower-end producer is the market leader in the second stage and the spillovers appear to be in both directions. In chapter 3, we analyze government policies by introducing R&D subsidy. We find that, in partially covered markets, the government is willing to subsidize the lower-end domestic firm regardless of whether there exists unemployment or not. The spillovers strictly increase product qualities. In fully covered markets, the government is willing to tax the foreign firm under full employment, resulting in creating a positive spillover effect on the foreign firm.