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R&D Delegation in a Duopoly with Spillovers

Author

Listed:
  • Versaevel Bruno

    () (EMLYON Business School & GATE (CNRS UMR 5824))

  • Vencatachellum Désiré

    () (African Development Bank)

Abstract

There is evidence that competing firms outsource R&D to the same independent for-profit laboratory. We draw on this stylized fact to construct a model where two firms in the same industry offer transfer payments in exchange for user-specific R&D services from a common laboratory. Inter-firm and within-laboratory externalities affect the intensity of competition among delegating firms on the intermediate market for technology. Whether competition is relatively soft or tight is reflected by each firm's monetary offers to the laboratory. These offers determine the R&D outcomes, the laboratory's capacity to earn benefits, the profits for the delegating firms, as well as social welfare. We identify the situations in which the laboratory finds it profitable to deliver services to only one firm, or to both of them. In the latter case we compare the delegated R&D game to two other ones where firms conduct in-house R&D, either cooperatively or non-cooperatively. The delegated R&D game Pareto dominates the other two games, and the laboratory earns positive benefits, if and only if R&D services are complementary inside the laboratory, but only limitedly so, and inter-firm spillovers are sufficiently low. The firms' privately-profitable decision to delegate R&D, when the laboratory participates, always benefits consumers.

Suggested Citation

  • Versaevel Bruno & Vencatachellum Désiré, 2009. "R&D Delegation in a Duopoly with Spillovers," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-42, December.
  • Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:55
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    References listed on IDEAS

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    1. Holmstrom, Bengt, 1989. "Agency costs and innovation," Journal of Economic Behavior & Organization, Elsevier, vol. 12(3), pages 305-327, December.
    2. Gamal Atallah, 2002. "Vertical R&D Spillovers, Cooperation, Market Structure, and Innovation," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 11(3), pages 179-209.
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    7. Symeonidis, George, 2003. "Comparing Cournot and Bertrand equilibria in a differentiated duopoly with product R&D," International Journal of Industrial Organization, Elsevier, vol. 21(1), pages 39-55, January.
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    Citations

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    Cited by:

    1. Etienne Billette de Villemeur & Richard Ruble & Bruno Versaevel, 2011. "Coordination and Cooperation in Investment Timing with Externalities?," Working Papers 1128, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    2. Billette de Villemeur, Etienne & Versaevel, Bruno, 2017. "One Lab, Two Firms, Many Possibilities: on R&D outsourcing in the biopharmaceutical industry," MPRA Paper 76903, University Library of Munich, Germany.
    3. Alain-Désiré Nimubona & Hassan Benchekroun, 2014. "Environmental R&D in the Presence of an Eco-Industry," Working Papers 1406, University of Waterloo, Department of Economics, revised Sep 2014.
    4. Evans, Shane, 2010. "Innovation contracts with leakage through licensing," Working Papers 10282, University of Tasmania, Tasmanian School of Business and Economics, revised 05 Oct 2010.
    5. Noriaki Matsushima & Koki Arai & Ikuo Ishibashi & Fumio Sensui, 2011. "The effects of non-assertion of patents provisions: R&D incentives in vertical relationships," ISER Discussion Paper 0807, Institute of Social and Economic Research, Osaka University.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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