R&D rivalry with endogenous compatibility

Abstract

A classic R&D rivalry is compared to R&D cooperation while embedded in a model of endogenous network compatibility. We show that complete incompatibility is more likely to occur with cooperative R&D. Complete incompatibility increases the advantage in R&D and profitability of the incumbent over the entrant. In our initial illustration, cooperation in network industries with endogenous compatibility generates no higher (and often lower) welfare than in non-network industries. In our generalization, cooperation in network industries generates welfare loss for a wider range of R&D spillovers. This suggests that R&D cooperation should receive stricter policy scrutiny in network industries with endogenous compatibility.