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Horizontal Agreements and R&D Complementarities: Merger versus RJV

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  • Ben Ferrett

    (School of Business and Economics, Loughborough University; GEP, University of Nottingham)

  • Joanna Poyago-Theotoky

    ()
    (School of Economics, La Trobe University; CRIEFF, University of St Andrews; Rimini Centre for Economic Analysis (RCEA); SIERC, Massey University)

Abstract

We study the decision of two firms within an oligopoly concerning whether to enter into a horizontal agreement to exploit complementarities between their R&D activities and, if so, whether to merge or form a research joint venture (RJV). In contrast to horizontal merger, there is a probability that an RJV contract will fail to enforce R&D sharing. We find that a horizontal agreement always arises. The insiders' merger/RJV choice involves a trade-off: While merger offers certainty that R&D complementarities will be exploited, it leads to a profit-reducing reaction by outsiders on the product market, where competition is Cournot. Greater brand similarity and contract enforceability ("quality") both favour RJV, while greater R&D complementarity favours merger. Interestingly, the insiders may choose to merge even when RJV contracts are always enforceable, and they may opt to form an RJV even when the likelihood of enforceability is negligible.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 13_12.

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Date of creation: May 2012
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Handle: RePEc:rim:rimwps:13_12

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Keywords: horizontal merger; research joint venture (RJV); contract enforceability; process R&D; R&D complementarity;

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  1. Tao, Zhigang & Wu, Changqi, 1997. "On the organization of cooperative research and development: Theory and evidence," International Journal of Industrial Organization, Elsevier, vol. 15(5), pages 573-596, August.
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  13. Pastor, Maite & Sandonis, Joel, 2002. "Research joint ventures vs. cross licensing agreements: an agency approach," International Journal of Industrial Organization, Elsevier, vol. 20(2), pages 215-249, February.
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  15. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
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