Entry Deterrence Through Cooperative R&D Over-Investment

We highlight conditions under which R&D agreements may harm consumers by increasing final prices. This occurs despite the fact that members of the R&D agreement increase their R&D efforts. We focus on cases where firms compete both in the final market and in buying an input necessary for R&D. The market is composed of a competitive fringe and two strategic firms that enjoy first mover advantage in both markets. By increasing its R&D input purchase, a strategic firm increases the cost to all of its rivals and in particular deters entry at the fringe. This reduces downstream competition and increases the final price. Therefore, an R&D agreement may induce strategic overbuying of R&D inputs by members of the agreement at the expense of rival firms and consumers.