Vertical research joint ventures

We examine the incentives of firms to form vertical research joint ventures (RJVs) which enable an upstream supplier to internalize the positive exter nality of its innovation on a downstream market, while giving the downstrea m members a cost advantage over their non-member rivals. Under the cost-sha ring rules considered, the upstream member desires a larger RJV compared to the downstream members. R&D subsidies may be detrimental to social welfare . The optimal RJV size for the upstream (downstream) member decreases (incr eases) with R&D cost and increases (decreases) with the gains from innovati on and the size of market. An increase in upstream competition has the effe ct of enlarging the optimal RJV. (C) 2001 Elsevier Science B.V. All rights reserved.