Optimal Sharing Strategies in Dynamic Games of Research and Development

This paper builds a theoretical foundation for the dynamics of knowledge sharing in private industry. In practice, research and development projects can take years or even decades to complete. We model an uncertain research process, where research projects consist of multiple sequential steps. We ask how the incentives to license intermediate steps to rivals change over time as the research project approaches maturity and the uncertainty that the firms face decreases. Such a dynamic approach allows us to analyze the interaction between how close the firms are to product market competition and how intense that competition is. If product market competition is relatively moderate, the lagging firm is expected never to drop out and the incentives to share intermediate research outcomes decreases monotonically with progress. However, if product market competition is relatively intense, the incentives to share may increase with progress. These results illustrate under what circumstances it is necessary to have policies aimed at encouraging cooperation in R&D and when such policies should be directed towards early vs. later stage research.Multi-stage R&D, Innovation, Knowledge Sharing, Licensing, Dynamic Games

Optimal Sharing Strategies in Dynamic Games of Research and Development

This paper analyses the dynamic aspects of knowledge sharing in R&D rivalry. In a model where research projects consist of N sequential stages, our goal is to explore how the innovators' incentives to share intermediate research outcomes change with progress and with their relative positions in an R&D race. We consider an uncertain research process, where progress implies a decrease in the level of uncertainty that a firm faces. We assume that firms are informed about the progress of their rivals and make joint sharing decisions either before or after each success. Changes in the firms' absolute and relative positions affect their incentives to stay in the race and the expected duration of monopoly profits if they finish the race first. We show that firms always prefer to have sharing between their independent research units if they are allowed to collude in the product market. However, competing firms may have either decreasing or increasing incentives to share intermediate research outcomes throughout the race. If the lagging firm never drops out, the incentives to share always decrease over time as the research project nears completion. The incentives to share are higher earlier on because sharing has a smaller impact on each firm's chance of being a monopolist at the end of the race. If the lagging firm is expected to drop out, the incentives to share may increase over time. We also use our framework to analyze the impact of patent policy on the sharing incentives of firms and show that as patent policy gets stronger, sharing incentives may decrease or increase depending on whether or not the lagging firm has increased incentives to drop out.

Vertical Foreclosure and Specific Investments

Are vertical mergers efficient or restraints to trade? This paper examines this long-standing question in a new setting and reaches new conclusions. We consider a realistic environment where downstream firms can make specific investments in several suppliers at once. In keeping with the "Chicago School" of regulation, we assume inputs are exchanged efficiently regardless of the ownership structure. Nevertheless, we find that vertical merger can be inefficient. A merged firm has an incentive to manipulate its ex ante investments to increase the ex post revenues of its supply unit. It will increase its investment in its internal supplier and decrease its investment in an external supplier relative to the efficient level of investments. The "skewing" is reinforced in equilibrium by other buyers who respond by skewing their own investments. The result is a reduction in the variety of inputs purchased by downstream firms. We relate the theory to studies of vertical mergers in pharmaceuticals and cable television.

Termination and Coordination in Partnerships

It is common practice for firms to pool their expertise by forming partnerships such as joint ventures and strategic alliances. A central organization problem in such partnerships is that managers may behave noncooperatively in order to advance the interests of their parent firms. We ask whether contracts can be designed so that managers will maximize total profits. We characterize first best contracts for a variety of environments and show that efficiency imposes some restrictions on the ownership shares. In addition, we evaluate the performance of two termination contracts that are widely used in practice: the shotgun rule and price competition. We find that although these contracts do not achieve full efficiency, they both perform well. We provide insight into when each rule is more efficient. Copyright (c) 1999 Massachusetts Institute of Technology.

A Theory of Buyer-Seller Networks

This paper introduces a new model of exchange: networks, rather than markets, of buyers and sellers. It begins with the empirically motivated premise that a buyer and seller must have a relationship, a “link, ” to exchange goods. Networks- buyers, sellers, and the pattern of links connecting them- are common exchange environments. This paper develops a methodology to study network structures and explains why agents may form networks. In a model that captures characteristics of a variety of industries, the paper shows that buyers and sellers, acting strategically in their own self-interests, can form the network structures that maximize overal

Vertical Integration, Networks, and Markets

The organization of supply relations varies across industries. This paper builds a theoretical framework to compare three alternative supply structures: vertical integration, networks, and markets. The analysis considers the relationship between uncertainty in demand for specific inputs, investment costs, and industrial structure. It shows that network structures are more likely when productive assets are expensive and firms experience large idiosyncratic shocks in demand. The analysis is supported by existing evidence and provides empirical predictions as to the shape of dierent industries