Equilibrium research joint ventures

Research joint ventures (RJVs) avoid duplication of R and D costs and facilitate knowledge diffusion. However, sharing R and D output intensifies post-innovation market competition and hence hampers firms' incentive to join an RJV. In this paper, RJV formation is modeled as a noncooperative sequential game, as in Bloch (1995, “Endogenous structures of association in oligopoly”, RAND Journal of Economics 26, 537–556). I show that in equilibrium a unique RJV exists, and it comprises of only a subset of the firms in the industry unless R and D cost is low. Moreover, the equilibrium RJV is larger than the size that maximizes the profit per member firm but smaller than the socially optimal size. When firms initially have different marginal costs, various RJV structures can emerge in equilibrium. For some parameter values of the model, large (low-cost) firms join hands in R and D, leaving small (high-cost) firms as outsiders. For other parameter values, a group of large firms invite small firms, instead of other large firms, to form an RJV.