R&D with Spillovers and Endogenous Absorptive Capacity

This paper derives a three-stage Cournot duopoly game for research cooperation, research expenditures, and product-market competition. The amount of knowledge firms can absorb is made dependent on their own research efforts, e.g., firms' absorptive capacity is treated as an endogenous variable. It is shown that cooperating firms invest more in R&D than noncooperating firms if spillovers are sufficiently large. The degree of market competition is a key determinant of the effects of research cooperation on research efforts, implying that existing models, which usually assume perfect competition, might be too restrictive.