This paper considers a model of horizontal and vertical product differentiation. Firms spending on R&D may improve the quality of their product. R&D cooperation in the form of a RJV among a subset of innovating firms introduces the possibility of a much better product being produced relative to the case of non-cooperation in R&D. Given Bertrand competition in the product market the RJV sets a common price for the improved good. It is shown that even under this extreme form of cooperation, there are clear instances where social welfare is enhanced relative to the non-cooperative outcome.
Available at: http://works.bepress.com/joanna_poyago_theotoky/22/