Cooperation and competition in an R&D market with spillovers

In a general setting with uncertainty and spillovers in R&D activity, we consider the incentive to cooperate among firms at any of the following three stages. Firms can jointly agree on the level of R&D expenditures (cost sharing), they can engage in an information sharing agreement, and they can setup joint research facilities (RJV). One of the major novelties of our research is that we introduce the concepts of offsetting and incremental spillovers. When the latter exist, there is a new incentive to cooperate in R&D due to the expansion of the market because of the increase in the number of producers. On the other hand, if spillovers reduce total profits, the innovating firm tends to retain the strategic gain from innovation. This enhances the possibility of a monopoly outcome, and makes competition desirable. We show that when spillovers are offsetting competition tends to be preferred to cooperation, but with incremental spillovers cooperation tends to be the more desirable. This same tendency, however, does not exist when considering the level of investment in R&D, where the type of spillovers has little effect, but the extent of spillovers is often crucial. Cost sharing usually leads to increased investment and profits compared with a fully competitive R&D market. However, it is not the most profitable form of cooperation. In most cases firms prefer a RJV to cooperation with cost sharing, and, in fact, a RJV is always preferred to IS agreements.