Noncooperative versus cooperative R&D with endogenous spillover rates

This paper deals with a general version of a two-stage model of R&D and product market competition. We provide a thorough generalization of previous results on the comparative performance of noncooperative and cooperative R&D, dispensing in particular with ex-post firm symmetry and linear demand assumptions. We also characterize the structure of profit-maximizing R&D cartels where firms competing in a product market jointly decide R&D expenditure, as well as internal spillover, levels. We establish the firms would essentially always prefer extremal spillovers, and within the context of a standard specification, derive conditions for the optimality of minimal spillover.     

DEFECTING FROM R&D COOPERATION

This paper introduces defection into the strategic R&D model. In defecting, a firm cheats by choosing its R&D expenditures to maximise its own profits, instead of maximising the joint profits of the cooperating firms. Two cooperative environments are considered: R&D cartelisation, where firms coordinate R&D activities; and RJV cartelisation, where firms coordinate R&D activities and share information. Under R&D cartelisation, defection entails an increase (decrease) in R&D and effective spillovers for low (high) spillovers; whereas under RJV cartelisation, defection always entails a decrease in R&D and effective spillovers. Under R&D cartelisation, consumer surplus and total welfare increase (decrease) with defection when spillovers are low (high). Whereas consumer surplus and welfare always decrease with defection under RJV cartelisation. Under R&D cartelisation, the incentives for defection first decrease then increase with spillovers; they also increase with the size of the market, but decline with production costs and R&D costs. Moreover, the incentives for defection are higher under RJV cartelisation. With low spillovers under RJV cartelisation, a firm prefers to be subject to defection by the other firm, to not cooperating at all. Punishment for defection is considered, under the form of abstaining from information sharing.     

Information sharing and the stability of cooperation in research joint ventures*

The model studies information sharing and the stability of cooperation in cost reducing Research Joint Ventures (RJVs). In a three-stage game-theoretic framework, firms decide on participation in a RJV, information sharing along with R&D expenditures, and output. An important feature of the model is that voluntary information sharing between cooperating firms increases information leakage from the RJV to outsiders. It is found that RJVs representing a larger portion of firms in the industry are more likely to share information. It is also found that when sharing information is costless, firms generally don't choose intermediate levels of information sharing: they share all the information or none at all. The size of the RJV is found to depend on three effects: a coordination effect, an information sharing effect, and a competition effect. Depending on the relative magnitudes of these effects, the size of the RJV may increase or decrease with spillovers. In response to an increase in leakages, RJV members reduce their R&D spending. In addition, they either increase the RJV size while maintaining information sharing unchanged (when leakages are low), or they reduce both information sharing and RJV size (when leakages are high).     

Market structure and R&D investment spillovers

This paper examines research and development (R&D) investment spillovers across different market structures. In particular, we extend the recent work in Matsumura et al. (2013) to incorporate R&D investment spillovers. When the market is a duopoly, noncooperative (cooperative) R&D investment is preferred for small (large) spillovers of less (more) than half. We show that as a market structure becomes more competitive, noncooperative R&D investment is more likely to be preferred. Moreover, noncooperative R&D is not always decreasing with the intensity of competition, even though it is ultimately zero with perfect competition. Our theoretical results fit well with existing empirical findings.     

Equal treatment and socially optimal R&D in duopoly with one‐way spillovers

This paper examines the standard symmetric two‐period R&D model with a deterministic one‐way spillover structure: know‐how flows only from the high R&D firm to the low R&D firm (but not vice versa). Though firms are ex ante identical, one obtains a unique asymmetric equilibrium (pair) in R&D investments, leading to interfirm heterogeneity in the industry. R&D cooperation by means of a joint lab is considered and compared to the non cooperative solution. The main part of the paper provides a second‐best welfare analysis in which we show that the joint lab yields a socially optimal R&D level subject to an equal treatment (of firms) constraint, which also coincides with the noncooperative solution in the absence of spillovers. We also investigate the welfare costs of this equal treatment constraint and find that they can be quite significant.     

Vertical R&D Spillovers,Cooperation, Market Structure,and Innovation

This paper studies vertical R&D spillovers between upstream and downstream firms. The model incorporates two vertically related industries, with horizontal spillovers within each industry and vertical spillovers between the two industries. Four types of R&D cooperation are studied: no cooperation, horizontal cooperation, vertical cooperation, and simultaneous horizontal and vertical cooperation. Vertical spillovers always increase R&D and welfare, while horizontal spillovers may increase or decrease them. The comparison of cooperative settings in terms of R&D shows that no setting uniformly dominates the others. Which type of cooperation yields more R&D depends on horizontal and vertical spillovers, and market structure. The ranking of cooperative structures hinges on the signs and magnitudes of three "competitive externalities" (vertical, horizontal, and diagonal) which capture the effect of the R&D of a firm on the profits of other firms. One of the basic results of the strategic investment literature is that cooperation between competitors decreases R&D when horizontal spillovers are low; the model shows that this result does not necessarily hold when vertical spillovers are sufficiently high, and/or when horizontal cooperation is combined with vertical cooperation.     

R&D Efficiency Gains Due to Cooperation

A theoretical and widely-quoted finding is that levels of cooperative R&D exceed noncooperative R&D levels when technological spillovers are relatively large, while the opposite holds for relatively small technological spillovers. We qualify this result by showing that for relatively small technological spillovers the comparison is not driven by the extent of technological spillover, but by the increase in technological spillover due to cooperation in R&D. In particular, an agreement to cooperate in R&D always raises R&D efforts if the post-cooperative technological spillover rate is high enough.     

Strategic Rivalry With Spillovers Within Segmented Versus Integrated Markets

We consider a two-stage game with firms investing in R&D in the first stage while competing [a] la Cournot in the second stage. The firms are located in two countries, which are either segmented or integrated. R&D spillovers occur between firms located in the same country as well as between firms located in different countries.

We first examine the consequences of market integration on the impact of national and international R&D spillovers on innovative efforts, effective R&D, profits and total welfare. Comparing the resulting equilibrium levels, we subsequently conclude that market integration always leads to higher R&D investments and output if international R&D spillovers are limited, while the welfare consequences are ambiguous. Finally, we also analyze the welfare maximization problem of a ‘constrained social planner who can only decide on the level of R&D spillovers.     

Infra-industry spillovers and R&D cooperation: Theory and evidence

We analyse both the theoretical and the empirical side of the issue of R&D spillovers. Each firm's R&D costs are increasing in the amount of information transmitted to other firms, and we account for the possibility that firms control spillovers. We consider both Cournot-Nash and Cournot-Stackelberg behavior. The empirical analysis suggests that (i) firms' control on spillovers is relatively low; (ii) the cost-saving effect associated to joint ventures or R&D cartels is confirmed for industries where firms rely mainly upon own R&D as a source of innovation; (iii) R&D cooperation may increase information sharing, thereby enhancing spillovers.     

Subsidizing cooperative and noncooperative R&D in duopoly with spillovers

Comparing the effect on private R&D investments of allowing firms to cooperate in R&D with that of providing R&D subsidies reveals that in general the latter policy is more effective than the former in promoting R&D activity. Analyzing the implementation of both policies simultaneously reveals that subsidizing cooperative and noncooperative R&D leads to the same market outcome. The preferred R&D-stimulating policy is to subsidize optimally an agreement according to which firms only share the outcomes of their independent research.     

Green Technology and Optimal Emissions Taxation

Unless an active environmental policy exists, firms have no incentive to engage in abatement or environmental R&D so policy design is of paramount importance. This design heavily depends on the way R&D spillovers operate. There are two distinct types of R&D spillover: output spillover and input spillover. An input spillover operates on the expenditure toward pollution reduction, whereas an output spillover manifests as the achieved abatement. Under optimal emissions taxation, significant differences arise due to this distinction, in particular, when the spillover operates on R&D inputs. In an oligopolistic setting, the result is higher R&D expenditure, but also higher aggregate emissions and, consequently, higher emissions taxes. By contrast, when spillovers occur in R&D output, there is a U‐shaped relationship between the optimal tax and the spillover, showing a trade‐off between the optimal tax rate and spillovers when these are low. In terms of the relative effectiveness of different R&D organization setups, combining emissions taxes with R&D cooperation, this paper shows that under low levels of R&D spillover R&D cooperation gives higher emissions reductions, whereas when spillovers are high this is not the case.     

Spillovers,subsidies, and second‐best socially optimal R&D

This paper provides a thorough second‐best welfare analysis of the standard two‐stage model of R&D/product market competition with R&D spillovers. The planner's solution is compared to the standard non‐cooperative scenario, the R&D cartel, and the cartelized research joint venture (or joint lab). We introduce the notion of a social joint lab, as a way for the planner to avoid wasteful R&D duplication. With no spillovers, the non‐cooperative scenario, the joint lab, and the second‐best planner's solutions coincide. However, with spillovers, all three scenarios yield R&D investments that fall short of the socially optimal level. To shed light on the role of the spillover level on these comparisons, we observe that the gaps between the market outcomes and the planners solutions widen as the spillover parameter increases. Finally, we establish that a social planner and a social joint lab solutions may be achieved starting from any of the three scenarios by offering firms respective suitably weighted quadratic R&D subsidization schedules.     

Cooperative R&D and Commitment to A Policy of Know-how Trading

In this paper, we develop a theoretical framework to investigate the impact of adopting a strategy of know-how trading on the degree of research and development (R&D) cooperation. We show that the consequences of cooperation in know-how sharing under the conditions of the model are similar to a policy of cooperation in R&D investments in areas with large spillovers. An industry-wide policy of cooperation among competitors with respect to R&D investment and sharing would simply result in maximal joint profits. This cooperative R&D outcome could be generalized to any degree of spillover other than 100%. In this paper, the commitment to a policy of know-how trading by the participants in an industry is explained by the firm’s attempt to induce the equilibrium of a single industry-wide cooperative research joint venture. In a repeated game framework, we show that pre-commitments by non-cooperative firms to disclose their own know-how to the industry can be effective in inducing cooperative R&D investments by the participants.     

Cooperation in R&D and production: a three-firm analysis

The paper analyzes, in a model of quantity-setting three firms, the interaction between cooperation decisions at the R&D stage and merger decisions at the production stage. We assume that only two of the three firms are capable of doing cost-reducing research. Two types of cooperative research, viz., the knowledge-sharing agreement and research joint venture are considered. Cost reduction in the case of a successful research joint venture is larger compared to knowledge sharing or independent research, due to possible synergies. We show that allowing mergers can change the organization of the R&D process, and admitting cooperative research can affect the occurrence and nature of mergers at the production stage.     

Research Joint Ventures with Asymmetric Spillovers and Symmetric Contributions

The paper proposes a new type of R&D cooperation between firms endowed with asymmetric spillovers, which we call symmetric Research Joint Venture (RJV) cartelization, based on reciprocity in information exchange. In this setting, firms coordinate their R&D expenditures and also share information, but such that the asymmetric spillover rates are increased through cooperation by equal amounts. It is found that this type of cooperation reduces R&D investment by the low spillover firm when its spillover is sufficiently low and the spillover of its competitor is sufficiently high. But it always increases the R&D of the high spillover firm, as well as total R&D (and hence effective cost reduction and welfare). A firm prefers no cooperation to symmetric RJV cartelization if its spillover rate is very high and the spillover rate of its competitor is intermediate. The profitability of symmetric RJV cartelization relative to other modes of cooperation is analyzed. It is found that symmetric RJV cartelization constitutes an equilibrium for a very wide range of spillovers, namely, when asymmetries between spillovers are not too large. As these asymmetries increase, the equilibrium goes from symmetric RJV cartelization, to RJV cartelization, to R&D competition, to R&D cartelization.     

Spillover, Competition and Better R&D Organization

This paper examines several types of R&D organization, including one noncooperative (independent R&D) form and three cooperative ones (R&D coordination, an R&D consortium and a research joint venture (RJV)). We consider the sharing of both research inputs and outputs in an R&D consortium and an RJV. We show that the superiority of a form of R&D organization cannot be determined uniquely, but should be judged by four parameters. In addition, it is shown that there exist possible mixes of these parameters in which an R&D consortium is superior to either R&D coordination or an RJV in terms of technological improvement and social welfare.
JEL Classification Numbers: L13, L41.     

THE OPTIMAL RISK CHOICE OF COOPERATIVE AND NONCOOPERATIVE R&D IN DUOPOLY WITH SPILLOVERS

This study examines the R&D risk choice in a duopoly market with technology spill overs. The firms conduct R&D programmes with different degrees of risk but an identical expected outcome and they compete or cooperate in R&D. Findings indicate that, in equilibrium, the R&D risk level decreases in the spill over rate under noncooperative R&D, while it may increase under cooperative R&D. Firms are more likely to engage in higher R&D risks under cooperative R&D than they are under non‐cooperative R&D. Moreover, the equilibrium R&D risk level both under competition and cooperation R&D is always too low from the perspective of social welfare, and the extent of this inefficiency increases with the spill over rate if the size of the spill over is large, but the opposite may occur if the size of the spill over is small.     

Spillovers,product innovation and R&D cooperation: a theoretical model

ABSTRACT

We analyze the impact of post-innovation knowledge spillovers on firms’ decisions to invest and cooperate in R&D, forming a research joint venture (RJV). We study the case of two potential investors involved in a non-tournament stochastic competition for developing a new but imitable product. We propose a theoretical model where cooperation may emerge as a subgame perfect Nash equilibrium of a three-stage game. In the first stage, firms decide whether to cooperate; in the second, they decide whether to invest; and in the third, they compete. We show that firms cooperate in R&D when the spillovers are high enough and the fixed costs associated with R&D activities are low enough; however, our analysis suggests that forming an RJV may not always be socially optimal, and subsidizing R&D cooperation may not be efficient. We propose an optimal scheme of subsidies, which should be designed according to the intensity of the spillovers, the level of the R&D costs, and the probability of innovation success. Finally, we show that in the case of mergers the private incentive to invest is maximized, and firms may not need public subsidies to cooperate. When subsidies are costly, not hindering mergers may be the second-best solution.     

Strategic timing in R&D agreements

We study the endogenous formation of R&D agreements in a R&D/Cournot duopoly model with spillovers where also the timing of R&D investments is endogenous. This allows us to consider the incentives for firms to sign R&D agreements over time. It is shown that, when both R&D spillovers and investment costs are sufficiently low, firms may find difficult to maintain a stable agreement due to the strong incentive to invest noncooperatively as leaders. In this case, the stability of an agreement requires that the joint investment occurs at the initial stage, thus avoiding any delay. When spillovers are sufficiently high, the coordination of R&D efforts becomes a profitable option, although firms may also have an incentive to sequence noncooperatively their investment over time. Finally, when spillovers are asymmetric and knowledge mainly leaks from the leader to the follower, investing as follower may become extremely profitable, making R&D agreements hard to sustain unless firms strategically delay their joint investment in R&D.     

Competitive and Harmonized R&D Policies for International R&D Alliances involving Asymmetric Firms

We examine R&D policies when a national firm forms an R&D alliance with a foreign competitor. Firms differ in R&D capabilities, select among three forms of R&D alliance and adopt a profit‐sharing rule if they coordinate their R&D decisions. When firms coordinate their R&D decisions and governments choose R&D policies independently, R&D taxes are chosen, but if governments harmonize their policies, they decide not to intervene. These policy outcomes affect the types of R&D alliance chosen. Agreements to share R&D information can outperform those with both coordination and sharing as a result of the R&D tax that coordination attracts.