Social Relations and R&D Networks in Oligopoly

In this paper, we study how exogenously given social relations (e.g. friendship) among the firm owners/managers influence the formation of an R&D collaboration network among the firms. In our framework, firms, prior to competing in the market, invest in R&D collaborations with others which lowers the costs of production. The extent of reduction in cost depends on the amount of investment and the indirect benefit that firm enjoys due to their social relations with others. We capture social relations by a trust network. We study the influence of trust networks on a firm's decision to form collaborative links, and the resulting Nash R&D network. We show, in equilibrium, the Nash R&D networks are such that firms collaborate either with a firm who is a trusted partner or with all the existing firms. We introduce a notion of pairwise stability and analyze efficiency and stability of the Nash R&D networks