The Effect of Entry on R&D Networks

We investigate the effect of potential entry on the formation and stability of R&D networks considering farsighted firms. We show that the presence of a potential entrant often alters the incentives of incumbent firms to establish an R&D link. In particular, incumbent firms may choose to form an otherwise undesirable R&D collaboration in order to deter the entry of a new firm. Moreover, an incumbent firm may refrain from establishing an otherwise desirable R&D collaboration, expecting to form a more profitable R&D link with the entrant. Finally, potential entry may lead an inefficient incumbent to exit the market. We also perform a welfare analysisand show that market and societal incentives are often misaligned.