- R&D portfolio; Multiproduct firms; Cross-market effect; R&D cooperation
We investigate the R&D portfolio choices of multiproduct firms. When a firm increases cost-reducing R&D investment in a given product, its rivals will modify their entire R&D portfolios by reducing R&D investments in that particular product and increasing R&D investments in other competing products. Our analysis demonstrates that R&D portfolios will be more specialized when firms face greater competition, which will be the case if products become closer substitutes, a monopolist begins to face competition from a rival firm, or firms compete on price rather than quantity. R&D cooperation allows firms to internalize the negative externalities of their R&D investments in two ways: by reducing such investments across all products and by increasingly focusing their R&D portfolios on different products. Firms may completely shut down a subset of their R&D projects under R&D cooperation if the products concerned are sufficiently close substitutes.
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