Downstream Research Joint Venture with Upstream Market Power

In this paper, we examine how the structure of an imperfectly com-petitive input market affects final-good producers ’ incentives to form a Research Joint Venture (RJV), in a differentiated duopoly where R&D in-vestments exhibit spillovers. Although a RJV is always profitable, down-stream firms ’ incentives for R&D cooperation are non-monotone in the structure of the input market, with incentives being stronger under a mo-nopolistic input supplier, whenever spillovers are low. In contrast to the hold-up argument, we also find that under non-cooperative R&D invest-ments and weak free-riding, final-good producers invest more when facing a monopolistic input supplier, compared with investments under compet-ing vertical chains. Integrated innovation and competition policies are also discussed. JEL classification: L13; O3