Cooperation vs. Competition in R&D: The Role of Stability of Equilibrium

We consider a model in which firms first choose process R&D expenditures and then compete in an output market. We show the symmetric equilibrium under R&D competition is sometimes unstable, in which case two asymmetric equilibria must also exist. For the latter, we find, in contrast to the literature that total profits are sometimes higher with R&D competition than with RJV cartelization (due to the cost asymmetry of the resulting duopoly in the noncooperative case). Furthermore, these equilibria provide another instance of R&D-induced firm heterogeneity.