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Horizontal Agreements and R&D Complementarities: Merger versus RJV

Ben Ferrett and Joanna Poyago-Theotoky

Discussion Paper Series from Department of Economics, Loughborough University

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, there is a probability that an RJV contract will fail to enforce R&D sharing. We find, first, that a horizontal agreement always arises. 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 brand similarity and contract enforceability (“quality”) both favour RJV, while greater R&D complementarity favours merger. 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.

Keywords: horizontal merger; research joint venture (RJV); contract enforceability; process R&D; R&D complementarity (search for similar items in EconPapers)
JEL-codes: O30 L13 D43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ind, nep-ino, nep-ipr, nep-pr~ and nep-tid
Date: 2012-04, Revised 2012-04
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http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Ferrett_WP2012_4.pdf

Related works:
Journal Article: Horizontal Agreements and R&D Complementarities: Merger versus RJV (2016) Downloads
Working Paper: Horizontal Agreements and R&D Complementarities: Merger versus RJV (2012) Downloads
Working Paper: Horizontal Agreements and R&D Complementarities: Merger versus RJV (2012) Downloads
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