R&D Cooperation Facilitates Cartel Formation

The objective of this research is to investigate the impact of R&D cooperation between firms on industry cartel formation. We consider process R&D investments aimed at reduction of the unit costs of manufacturing. These investments create positive externalities for the competitors. We assume that the competition between rival firms in the industry takes place according to the Stackelberg (quantity) leadership model. For simplicity, we focus on the duopoly symmetric case. Numerical analysis shows that closer cooperation between rivals at the R&D stage strengthens the incentives to create a cartel in the final product market, thus serious public policy concerns occur.