Equilibrium and Optimal Size of a Research Joint Venture in an Oligopoly with Spillovers

Abstract

This paper analyzes a simple oligopoly model with information spillovers. Firms spend on R&D to affect their costs of production. The main finding is that, depending on the magnitude of the spillover, the market may not provide enough incentives for the optimum degree of cooperation to take place. It is shown that the equilibrium size of a research joint venture is usually less than the optimum size, which requires all firms to participate in the research joint venture. The policy implications of this result are that there should be encouragement for firms competing in high-technology industries to form industry-wide cooperative agreements. Copyright 1995 by Blackwell Publishing Ltd.