Inducing R&D investment with price ceilings

Though government intervention is prevalent in the market for research and development (R&D), most literature has focused on the use of subsidies, patents or joint research ventures to obtain the efficient R&D investment. By using a two-stage duopoly model in which firms first choose the level of investment and then output, our paper shows that the introduction of a price ceiling by the regulator will result in the optimal level of R&D. This interesting but counterintuitive result contrasts with the existing literature and advances our understanding about price ceilings.