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Coordination costs: a drawback for research joint ventures?
preprint
posted on 2006-02-14, 13:13 authored by Rod Falvey, Joanna Poyago-Theotoky, Khemarat TeerasuwannajakWe analyze a simple oligopoly model where firms can engage in cost-
reducing R&D. We compare two R&D regimes: R&D competition and
R&D cooperation where firms can enter in a Research Joint Venture
(RJV). We introduce coordination costs for the RJV and examine how
these affect the equilibrium outcomes. Further, we examine the ques-
tion of the equilibrium versus optimal size of the RJV. For a given size
of the RJV, its members decrease their own R&D as the anticipated
coordination costs increase. This results in lower output and profits.
On the contrary, the non-RJV firms increase their R&D investments
in response to the fall in the RJV firms' R&D.We show that the per-
formance of the RJV in terms of R&D investment, profit and welfare
in relation to R&D competition is sensitive to the level of coordination
costs. Furthermore, we show that, although the RJV as a whole may no longer conduct a unit of R&D at a lower cost compared to the in-
dependent firm under the non-cooperative R&D regime, its members
can still make savings on their own R&D expense through information
sharing. Finally, we find that not only the equilibrium size becomes
smaller as coordination costs increase, but the discrepancy between
the equilibrium and optimal sizes is widening. One important message
from our analysis is that by ignoring the coordination costs of oper-
ating the RJV, the anticipated benefits or success of the cooperative
project could have been grossly exaggerated.
History
School
- Business and Economics
Department
- Economics
Pages
259460 bytesPublication date
2006Notes
This is part of an Economics Discussion Series. It is also available: http://ideas.repec.org/p/lbo/lbowps/2006_3.html.Language
- en