"Vertical research joint ventures"JEL codes: L13; O32
Abstract: We examine the incentives of firms to form vertical research joint ventures (RJVs) which enable an upstream supplier to internalize the positive externality of its innovation on a downstream market, while giving the downstream members a cost advantage over their non-member rivals. Under the cost-sharing rules considered, the upstream member desires a larger RJV compared to the downstream members. R&D subsidies may be detrimental to social welfare. The optimal RJV size for the upstream (downstream) member decreases (increases) with R&D) cost and increases (decreases) with the gains from innovation and the size of market. An increase in upstream competition has the effect of enlarging the optimal RJV.