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ON THE EFFECT OF IMPERFECT COLLUSION ON PROFITABILITY AND R&D

Marc Escrihuela-Villar () and Jorge Guillã‰n ()
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Jorge Guillã‰n: ��Escuela de Administración de Negocios para Graduados (ESAN). Alonso de Molina 1652, Monterrico, Surco. Lima, Perú

Authors registered in the RePEc Author Service: Jorge Guillén ()

The Singapore Economic Review (SER), 2021, vol. 66, issue 05, 1249-1259

Abstract: We consider a theoretical model where firms can reduce their initial unit costs by spending on R&D. We show that the degree of product market collusion (captured by the coefficient of cooperation) might reduce firms’ profits if innovation is made non-cooperatively. The intuition is that non-cooperative R&D introduces a negative externality where firms invest over and above the amount required to minimize costs so as to extract profits from their rival firm. Therefore, when product market competition drops below a certain level, a relatively large amount is spent on R&D with just a small output, making further collusion unprofitable. On the contrary, a Research Joint Venture (RJV) helps to internalize the externality and further product market collusion always increases firms’ profits. As a consequence, total welfare may be lower if R&D is made cooperatively.

Keywords: R&D; Imperfect collusion; research joint ventures (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0217590817500230

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