We consider a simple oligopoly model where firms engage in cost-reducing R&D and compare two R&D regimes: R&D competition and R&D cooperation where firms can enter in a Research Joint Venture (RJV). We introduce coordination costs for the RJV and examine how these affect the equilibrium outcomes. Further, we address the question of the equilibrium versus the optimal size of the RJV. For a given size of the RJV, its members decrease their own R&D as the anticipated coordination costs increase. This results in lower output and profits. On the contrary, the non-RJV firms increase their R&D in response to the fall in the RJV firms' R&D. We show that the performance of the RJV in terms of R&D, profit and welfare in comparison to R&D competition is sensitive to the level of coordination costs. Furthermore, we show that, although the RJV as a whole may no longer conduct a unit of R&D at a lower cost compared to the independent firm under the non-cooperative R&D regime, its members can still make savings on their own R&D outlay through information sharing. Finally, we find that not only the equilibrium size decreases as coordination costs increase, but the discrepancy between the equilibrium and optimal sizes widens.
- research joint venture (RJV),
- process innovation,
- coordination costs,
- equilibrium size,
- optimal size
Available at: http://works.bepress.com/joanna_poyago_theotoky/28/