Horizontal Agreements and R&D Complementarities: Merger versus RJV

Posted by D. Daniel Sokol

Ben Ferrett (School of Business and Economics, Loughborough University, UK) and Joanna Poyago-Theotoky (School of Economics, La Trobe University, Australia) describe Horizontal Agreements and R&D Complementarities: Merger versus RJV.

ABSTRACT: We study the decision of two firms within an oligopoly concerning whether to enter into a horizontal agreement to exploit complementarities between their R&D activities and, if so, whether to merge or form a research joint venture (RJV). In contrast to horizontal merger, there is a probability that an RJV contract will fail to enforce R&D sharing. We find, first, that a horizontal agreement always arises. The insiders’ merger/RJV choice involves a trade-off. While merger offers certainty that R&D complementarities will be exploited, it leads to a profit-reducing reaction by outsiders on the product market, where competition is Cournot. Greater brand similarity and contract enforceability (“quality”) both favour RJV, while greater R&D complementarity favours merger. Interestingly, the insiders may choose to merge even when RJV contracts are always enforceable, and they may opt to form an RJV even whe! n the likelihood of enforceability is negligible.