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Cooperative R&D under Uncertainty with Free Entry

  • Nisvan Erkal:Daniel Piccinin

In the last few decades, the effects of cooperative R&D arrangements on innovation and welfare have played an important role in policy making. The goal of this paper is to analyze the effects of cooperative R&D arrangements in a model with a stochastic R&D process and output spillovers. Our main innovation is to allow for free entry in both the R&D race and the product market. To determine the desirability of cooperation in R&D environments, we compare three different ways of organizing R&D activities: R&D competition, R&D cartels, and RJV cartels. In contrast with the literature, we assume that cooperative R&D arrangements do not have to include all of the firms in the industry. We show that sharing of research outcomes is a necessary condition for the profitability of cooperative R&D arrangements with free entry. The profitability of RJV cartels depends on their size. The impact of cooperative R&D arrangements on the aggregate level of innovation depends on whether there are participants in the R&D race who are a part of the cooperative R&D arrangement. If some outsiders choose to participate in the R&D race, the aggregate rate of innovation remains unaffected by the formation of a cooperative R&D arrangement. Otherwise, it increases. R&D cartels may be welfare-improving in cases when they cause the aggregate rate of innovation to increase. In such cases, it may be desirable to subsidize them. Since sharing of R&D outcomes affects the equilibrium number of firms in the product market after the R&D race, the consumer welfare effects of RJV cartels are sensitive to the specification of consumer preferences. Subsidies may be desirable in cases of larger RJVs since they are the ones which are less likely to be profitable.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 999.

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Length: 42 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:mlb:wpaper:999
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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  1. Hauenschild, Nils, 2003. "On the role of input and output spillovers when R&D projects are risky," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1065-1089, October.
  2. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-37, December.
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  17. Motta, Massimo, 1992. "Cooperative R&D and vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 10(4), pages 643-661, December.
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  22. Combs, K. L., 1992. "Cost sharing vs. multiple research projects in cooperative R&D," Economics Letters, Elsevier, vol. 39(3), pages 353-357, July.
  23. Glenn C. Loury, 1976. "Market Structure and Innovation," Discussion Papers 256, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  24. Vonortas, Nicholas S., 1994. "Inter-firm cooperation with imperfectly appropriable research," International Journal of Industrial Organization, Elsevier, vol. 12(3), pages 413-435, September.
  25. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-18, December.
  26. De Bondt, Raymond, 1997. "Spillovers and innovative activities," International Journal of Industrial Organization, Elsevier, vol. 15(1), pages 1-28, February.
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