Collusion with asymmetric R&D

We consider the effects of product market cooperation on R&Dinvestment, profits, consumer surplus and welfare. We show that though R&Dinvestment, consumer surplus and social welfare may be higher or lower underproduct market cooperation than product market competition, industry profit isalways higher under product market cooperation. Whether R&D investments,consumer surplus and welfare are higher under cooperation depend on the degree ofknowledge spillover and the slope of the marginal cost of R&D. If the degree ofknowledge spillover is sufficiently large and the slope of the marginal cost of R&D issufficiently small, cooperation makes both producers and consumers better off.