Cooperative R&D for a New Product under Convex Production Costs

The role of knowledge spillover for cooperative research and development (R&D), where firms commit before R&D about sharing R&D outcomes and choosing joint profit maximising R&D investments, is well known. In a duopoly model of product innovation with a stochastic non-tournament R&D process, we show that the firms may prefer cooperative R&D compared to non-cooperative R&D in the presence of convex production costs, even if there is no knowledge spillover. Thus, we provide a new reason for cooperative R&D. Consumer surplus and the expected welfare can be higher under cooperative R&D compared to non-cooperative R&D. We further show that the convex production costs create the incentive for technology licensing ex-post R&D. In the presence of licensing ex-post R&D, the firms prefer joint profit maximising R&D investments with the option for licensing ex-post R&D, while the consumers and the society may prefer cooperative R&D. Hence, a proper distribution scheme, such as a tax/subsidy policy, might be required to encourage firms to undertake cooperative R&D. Our analysis may provide some implications for vaccine research.