Horizontal Agreements and R&D Complementarities: Merger versus RJV

Ben Ferrett and Joanna Poyago-Theotoky

International Journal of the Economics of Business, 2016, vol. 23, issue 1, 87-107

Abstract: We study the decision of two firms within an oligopoly concerning whether to enter into a horizontal agreement to exploit complementarities between their R&D activities and if so, whether to merge or form a research joint venture (RJV). In contrast to horizontal merger and motivated by real-world evidence, we incorporate a probability that an RJV contract will fail to enforce R&D sharing. We find that a horizontal agreement always arises in equilibrium, which is consistent with empirical findings that R&D complementarities between firms positively influence the formation of horizontal agreements. The insiders’ merger/RJV choice involves a trade-off: While merger offers certainty that R&D complementarities will be exploited, it leads to a profit-reducing reaction by outsiders on the product market, where competition is Cournot. Greater contract enforceability (quality) and R&D investment costs both favour RJV. Interestingly, the insiders may choose to merge even when RJV contracts are always enforceable, and they may opt to form an RJV even when the likelihood of enforceability is negligible. We also explore the welfare implications of the firms’ merger/RJV choice.

Date: 2016
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Related works:
Working Paper: Horizontal Agreements and R&D Complementarities: Merger versus RJV (2012)
Working Paper: Horizontal Agreements and R&D Complementarities: Merger versus RJV (2012)
Working Paper: Horizontal Agreements and R&D Complementarities: Merger versus RJV (2012)
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DOI: 10.1080/13571516.2015.1049848

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