Cooperative Product Development and Endogenous Information Sharing

In this paper, a model of product innovation is developed that endogenizes the degree of cooperation. Two opposing forces affect firm profit in an R&D joint venture. Cooperation increases the quality of the product but it also makes the new products more similar. The increasing substitutability of the product intensifies competition in the production stage. Thus, it may not be optimal to share all of the product information. The basic model is altered to allow for a joint-selling agreement and for tariffs or transport costs. Firms are found to increase R&D cooperation if they are protected from product market competition.