A Kantian Analysis of Pricing and R & D

Abstract

Can cooperation offer an innovative alternative to competition among firms? This design problem is analyzed in the context of Kantian cooperation among firms in a two-stage model. In the first stage, firms invest in R&D, which increases the probability of obtaining a superior technology. In the second stage, firms observe their technology, and choose their prices. The equilibrium R&D levels under competition, Kantian cooperation, and cartel cooperation are analyzed and compared. We show that without (with) perfect research spillovers, Kantian price cooperation supports weakly higher (lower) R&D than does cartel price cooperation. Moreover, the results are compared to the social optimum. Among the cases that we studied, only Kantian cooperative pricing with competitive R&D can induce an R&D investment that exceeds the socially optimal level, and all other R&D outcomes in our study unambiguously fall below the socially optimum level.