Advantageous or Disadvantageous Semi-collusion

This paper compares profits and consumer surplus under non-cooperation and collusion in the product market when the firms have the option for R&D before production. We show that whether R&D investment would be higher under noncooperation or product market collusion depends on the R&D productivity. If the market size is sufficiently small then firms are always better off under product market collusion. If the market size is moderate (relatively large) then the firms are better off under non-cooperation (semi-collusion) for sufficiently lower pre-innovation costs of production.We also show that in case of moderate (relatively large) market size, firms are better off under non-cooperation for relatively lower (higher) R&D productivity. However, we find that consumer welfare is always higher under non-cooperation in product market compared to collusion in product market.