A Built Economy in Education, Sustainability and Regulation
Edited by Jean Bonnet, Marcus Dejardin and Antonia Madrid-Guijarro
Chapter 7: Uncertainty and Vertical Cooperation in R & D: The Case of Monopoly
7. Uncertainty and vertical cooperation in R&D: the case of monopoly Mathilde Aubry INTRODUCTION Research and development activity (R&D) is, by nature, a source of market failure; knowledge production is sub-optimal for two major reasons: ● ● First, uncertainty about the outcome of R&D activity, and its impact on the market in terms of profits. Second, firms may not be able to appropriate all of the benefits from their research. Knowledge disclosure, spillovers or free-riding behaviours incite them not to engage in R&D. The difference between huge costs in research and development and low costs to reproduce innovation leads to R&D expenditures below the socially optimal level. Even if they limit this difference, patents appear like an imperfect solution. To turn the production of knowledge into commercial outcomes, firms have to engage in interactive learning (Caraça et al., 2009). Cooperative R&D is a sharing of resources between independent firms in order to innovate. This agreement can help limit market failures. The theoretical scholarship has considered this phenomenon of R&D cooperation since the end of the eighties. Authors have focused on horizontal alliances, i.e. firms that compete for a share in the market (Katz, 1986; D’Aspremont and Jacquemin, 1988; Katz et al., 1990; Kamien et al., 1992; Suzumura, 1992; Choi, 1993). Cooperation between firms has been analysed as an incentive to increase R&D investment and foster innovation1. Vertical cooperation forms are nevertheless widespread. In this case, an upstream firm produces an intermediate input which...
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