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Horizontal Agreements and R&D Complementarities: Merger versus RJV

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  • Joanna Poyago-Theotoky
  • Ben Ferrett

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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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 1201.

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Handle: RePEc:san:crieff:1201

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

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  1. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  2. Fershtman, Chaim & Gandal, Neil, 1994. "Disadvantageous semicollusion," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 141-154, June.
  3. Hernán, Roberto & Marín Uribe, Pedro Luis & Siotis, Georges, 2000. "An Empirical Evaluation Of The Determinants Of Research Joint Venture Formation," CEPR Discussion Papers 2442, C.E.P.R. Discussion Papers.
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  6. Ralph Siebert & Klaus Gugler, 2004. "Market Power versus Efficiency Effects of Mergers and Research Joint Ventures: Evidence from the Semiconductor Industry," NBER Working Papers 10323, National Bureau of Economic Research, Inc.
  7. Perez-Castrillo, J. David & Sandonis, Joel, 1997. "Disclosure of know-how in research joint ventures," International Journal of Industrial Organization, Elsevier, vol. 15(1), pages 51-75, February.
  8. Lars-Hendrik Röller & Ralph Siebert & Mihkel M. Tombak, 2007. "Why Firms Form (or do not Form) RJVS," Economic Journal, Royal Economic Society, vol. 117(522), pages 1122-1144, 07.
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  11. 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.
  12. Darmot Leahy & J. Peter Neary, 1997. "Public Policy Towards R & D in Oligopolistic Industry," Politická ekonomie, University of Economics, Prague, vol. 1997(5), pages 683-698.
  13. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-306, December.
  14. 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.
  15. Christos Cabolis & Constantine Manasakis & Emmanuel Petrakis, 2008. "Horizontal Mergers and Acquisitions with Endogenous Efficiency Gains," Working Papers 0817, University of Crete, Department of Economics.
  16. 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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