COOPERATIVE R&D WITH DIFFERENTIATED PRODUCTS IN VERTICALLY RELATED INDUSTRIES

Abstract

This paper studies the impact of cooperative R&Don innovation, welfare, and profitability in vertically related industries with differentiated products. The model incorporates two vertically related industries, with horizontal spillovers within industries and vertical spillovers between them. Upstream firms produce a homogeneous intermediate good, while downstream firms provide differentiated products. Three types of R&D cooperation are studied: no cooperation, horizontal cooperation, and vertical cooperation. The comparison of cooperation settings in terms of R&D and profitability shows that although vertical cooperation yields higher innovation and welfare, it may lead to over–investment in R&D.

Keywords

• vertical spillovers
• horizontal spillovers
• product differentiation
• r&d cooperation