ENDOGENOUS FORMATION OF A JOINT LAB IN AN OLIGOPOLISTIC MARKET: PRIVATE INCENTIVES, COLLECTIVE INCENTIVES AND WELFARE

Abstract

In this paper, we study the endogenous formation of a joint lab in an oligopolistic market. We compare the situation where N firms choose their R&D efforts non-cooperatively and the situation where a subset of firms conduct their R&D through a partial joint lab. We show that the profits of the firms joining a lab increase with its size until a certain critical size. Beyond this critical size, the profits of the players decrease with the growth of the dimension of the lab. An important result yields that the socially optimum size of the lab is lower than the equilibrium size when the output spillover levels are sufficiently low such as applied research. The policy implications to this result suggest the intervention of public authorities to prohibit firms to form the grand joint lab or partial cooperations that can emerge spontaneously but are detrimental to social welfare through the strengthening of antitrust laws.