miyagiwa_04

This paper addresses two questions: (1) does R&D cooperation facilitate price collusion, and (2) why do R&D partnerships break up at high rates (20% in one estimate)? Innovation creates an inter-firm cost asymmetry, which makes collusion difficult to sustain. The prospect of collusion ending with discovery makes collusion difficult to maintain before discovery. R&D cooperation averts this chain reaction and facilitates collusion before and after innovation. However, the firms’ inability to monitor partners’ R&D inputs constrains the extent of cooperation. To curb the opportunism, the partnership may dissolve itself with positive probability every time it fails to innovate.

Title:	Price Collusion and Stability of Research Partnerships
Number:	04-15
Author:	Kaz Miyagiwa
Issue Date:	October 2004 (revised, November 2004)
Abstract:	This paper addresses two questions: (1) does R&D cooperation facilitate price collusion, and (2) why do R&D partnerships break up at high rates (20% in one estimate)? Innovation creates an inter-firm cost asymmetry, which makes collusion difficult to sustain. The prospect of collusion ending with discovery makes collusion difficult to maintain before discovery. R&D cooperation averts this chain reaction and facilitates collusion before and after innovation. However, the firms’ inability to monitor partners’ R&D inputs constrains the extent of cooperation. To curb the opportunism, the partnership may dissolve itself with positive probability every time it fails to innovate.