Endogenous network formation in patent contestsand its role as a barrier to entry

In a setting of R&D co-opetition we study, by using an all-pay auction approach, howcollaboration affects strategic decisions during a patent contest, and how the latter influences thepossible collaboration network structures the firms can hope to form. The all pay auctionapproach allows us to 1) endogenize both network formation and R&D intensities and 2) takeheterogeneous and private valuations for patents into account. We find that, different fromprevious literature, the complete network is not always the only pairwise stable network, even andespecially if the benefits from cooperating are important. Interestingly, the other possible stablenetworks all have the realistic property that some firms decide not to participate in the contest.Thus, weak cooperation through network formation can serve as a barrier to entry on the marketfor innovation. We further show that there need not be any network that survives a well knownrefinement of pairwise stability, strong stability, which imposes networks to be immune tocoalitional deviations....