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Cooperative R&D Agreements, Social Welfare, Bertrand Duopoly Model, Two Stage Game
Technological progress is crucial for economic growth and enhancement of standard of living in any economy. But firms often have insufficient incentive for R&D, because in spite of patent protection, the benefits of R&D are not always limited to the firms that initially conduct the R&D activities. Consequently, governments around the world often undertake industrial policies to promote collaborative R&D efforts between firms in order to increase R&D. This paper examines the implications of cooperative R&D agreements for the societal well being. The R&D and price decisions are analyzed using a Bertrand Duopoly Model in presence of product differentiation in a two-stage game. It is shown that under cooperative R&D agreements R&D and output levels are larger and prices are lower than under non-cooperation. For complementary and independent goods, these results are valid for any degree of R&D spillover and for substitute goods they may hold even for sufficiently small R&D spillover. These results are more general than D'Aspremont and Jacquemin (1988) who have shown that cooperative R&D levels exceed those under non-cooperation only for large R&D spillover. As for the level of social welfare, this paper finds the cooperative as well as the non-cooperative R&D output and price levels to be socially inefficient. However, cooperative R&D agreements tend to dominate non-cooperative R&D ventures in terms of social welfare. This result also holds for any degree of R&D spillover for complementary and independent goods and even for sufficiently small spillover in the case of substitute goods.
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