Equilibrium analysis and coalition stability in R&D cooperation with spillovers

This article analyzes cost-reducing R&D cooperation by n horizontal firms, and studies two common cooperation modes with knowledge spillovers: R&D cartels (CT) and research joint ventures (RV). These firms are allowed to freely form coalitions (or alliances) among themselves to better coordinate their R&D efforts, and then compete in the production stage. We model the endogenous alliance/coalition formation between n firms given coalition structures as a two-stage game, in which the firms in the first stage choose to cooperate in R&D, and in the second stage all firms play a Cournot game in production quantity. Our results show that the coalition structure’s stability is closely affected by spillover rate and degree of R&D difficulty, number of participant firms, cooperation modes, and myopic and farsighted views. We find that the grand coalition is not always myopic stable and is farsighted stable under the CT mode with a three-firm or four-firm market, while the grand coalition is always not myopic stable but is farsighted stable under the RV mode only with a four-firm market. Moreover, we find that the conditions under which there are no myopic stable coalition structures for the RV and CT modes with regard to spillover rate and degree of R&D difficulty differ.