Social Relations and R&D Networks in Oligopoly

In this paper, we study, how social relations among the firm owners, employees influence their decision to form R&D collaborations with each other. We consider an oligopoly market set-up with n homogeneous firms. Each firm has a representative individual (owner/manager). We examine, how exogenously given social relations (such as friendship, trust, kinship) among the representative individuals influence the evolution of the R&D collaborations network among the firms. Since firms (owners) are involved in multiple layers of interactions, we adopt a multiplex network approach to study R&D network formation. Firms first decide about their levels of investment in R&D collaborations which reduces the marginal costs of production and then engages in Cournot quantity competition. Firms' decisions about R&D collaboration are swayed by their given social relations which we capture by a social network (we call it trust network). We look at the structure of the Nash networks of the game, generated by the equilibrium investment strategies of the firms (we call it Nash R&D network) and examine how the structures of Nash R&D networks change as the structure of underlying trust network changes. We show, in the equilibrium firms do not always collaborate with trusted partners. The structure of the Nash network is such that firms collaborate either with a firm that is a trusted partner (friend) or with all the existing firms. We introduce a notion of pairwise stability in line with the definition provided by Jackson and Wolinsky (1996) and show that only a completely connected Nash R&D network structure turns out to be pairwise stable. No efficient Nash R&D network emerges in our framework