DEFECTING FROM R&D COOPERATION

Gamal Atallah

Australian Economic Papers, 2006, vol. 45, issue 3, 204-226

Abstract: 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.

Date: 2006
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