Cooperative R&D and vertical product differentiation

A partial equilibrium model with vertical product differentiation, Coumot competition and quality determined by R&D expenses is analysed. Cooperative agreements on R&D entail higher levels of R&D, quality, output and welfare than at the non-cooperative equilibrium, under well denned conditions on spillover rates. This confirms, in a new setting, a well-known outcome of models with cost reducing R&D. Further, cooperation in R&D allows a larger number of firms to operate in the industry than in the non-cooperative case. Via a reduction in prices, a new source of social gains from cooperative research is identified.