Multi-Market Interaction and Decentralization of R&D Decisions

In this paper, we analyse under what conditions it is profitable for a multi-divisional firm to encourage divisions to perform independent R&D, and when it is better to centralize R&D so that the level be chosen co-operatively. Under Bertrand competition, firms always centralize R&D decisions. Under Cournot competition, however, with divisions of the same firm producing substitute products, the strategic advantage of decentralizing R&D compensates the co-ordination loss when the degree of substitutability among the products is not too high; in all other cases (when products are very good substitutes or when divisions of the same firm produce complement goods) the pay-off to co-ordination is greater than the strategic advantage of decentralization. Social welfare is maximized when firms centralize R&D