The Effect of Entry on R&D Networks

We investigate the effect of potential entry on the formation and stability of R&D networks considering farsighted firms. We show that the presence of a potential entrant often alters the incentives of incumbent firms to establish a link. In particular, incumbent firms may choose to form an otherwise undesirable collaboration in order to deter the entry of a new firm. Moreover, an incumbent firm may refrain from establishing an otherwise desirable collaboration, expecting to form a more profitable link with the entrant. Finally, potential entry may lead an inefficient incumbent to exit the market. We also perform a welfare analysis that shows market and social incentives to be often misaligned and we propose a subsidy scheme that encourages welfare improving entry