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Horizontal Agreements and R&D Complementarities: Merger versus RJV

Author

Listed:
  • Ben Ferrett

    (School of Business and Economics, Loughborough University; GEP, University of Nottingham)

  • Joanna Poyago-Theotoky

    (School of Economics, La Trobe University; CRIEFF, University of St Andrews; Rimini Centre for Economic Analysis (RCEA); SIERC, Massey University)

Abstract
We study the decision of two firms within an oligopoly concerning whether to enter into a horizontal agreement to exploit complementarities between their R&D activities and, if so, whether to merge or form a research joint venture (RJV). In contrast to horizontal merger, there is a probability that an RJV contract will fail to enforce R&D sharing. We find that a horizontal agreement always arises. The insiders' merger/RJV choice involves a trade-off: While merger offers certainty that R&D complementarities will be exploited, it leads to a profit-reducing reaction by outsiders on the product market, where competition is Cournot. Greater brand similarity and contract enforceability ("quality") both favour RJV, while greater R&D complementarity favours merger. Interestingly, the insiders may choose to merge even when RJV contracts are always enforceable, and they may opt to form an RJV even when the likelihood of enforceability is negligible.

Suggested Citation

  • Ben Ferrett & Joanna Poyago-Theotoky, 2012. "Horizontal Agreements and R&D Complementarities: Merger versus RJV," Working Paper series 13_12, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:13_12
    as

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    File URL: http://www.rcea.org/RePEc/pdf/wp13_12.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Matsushima Noriaki & Sato Yasuhiro & Yamamoto Kazuhiro, 2013. "Horizontal Mergers, Firm Heterogeneity, and R&D Investments," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 959-990, August.

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    More about this item

    Keywords

    horizontal merger; research joint venture (RJV); contract enforceability; process R&D; R&D complementarity;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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