Optimal Technology Sharing Strategies in Dynamic Games of R&D

• Date: 01 March 2014
• Author: Nisvan Erkal,Deborah Minehart
• DOI: http://doi.org/10.1111/jems.12042
• Published date: 01 March 2014

Optimal Technology Sharing Strategies in Dynamic

Games of R&D

NISVAN ERKAL

Department of Economics, University of Melbourne,

Victoria 3010, Australia

n.erkal@unimelb.edu.au

DEBORAH MINEHART

United States Department of Justice, Washington, DC 20530

deborah.minehart@usdoj.gov

A question central to R&D policy making is the impact of competition on cooperation. This

paper builds a theoretical foundation for the dynamics of knowledge sharing in private industry.

We model an uncertain research process and ask how the incentives to license intermediate

steps to rivals change over time as the research project approaches maturity. Such a dynamic

approach allows us to analyze the interaction between how close the firms are to product market

competition and how intense that competition is. We uncover a basic dynamic of sharing such

that firms are less likely to share as they approach the product market. This dynamic is driven

by a trade-off between three effects: the rivalry effect, the duplication effect and the speed effect.

We show that this dynamic can be reversed when duopoly profits are sufficiently low or when

the firms have asymmetric research capabilities. We also explore the implications of the model for

patent policy, and compare policies targeting early researchoutcomes with policies targeting late

research outcomes.

1. Introduction

This paper builds a theoretical foundation for the dynamics of knowledge sharing in

private industry.The substantial evidence on licensing, research alliances, and joint ven-

tures reveals that knowledge sharing arrangements are a central way in which firms

acquire technological knowledge. From a social welfare perspective, sharing of research

outcomes is desirable because it results in less duplication. Since the 1980s, governments

in the United States and Europe have actively promoted joint R&D projects through

subsidies, tolerant antitrust treatment, and government–industry partnerships.1At the

We aregrateful to Fedor Iskhakov, Sue Majewski, John Rust, Suzanne Scotchmer, and especially John Conlon

and Ethan Ligon for their comments. Wealso would like to thank conference participants at the AEA Annual

Meetings, NASM, ESAM, Midwest Economic Theory Meetings, SAET, IIOC, and seminar participants at

Case WesternReserve University, U.S. Department of Justice, University of Adelaide, University of Arkansas,

University of California-Berkeley, University of Colorado-Boulder, University of Concordia, University of

Melbourne, and University of Missouri-Columbia for their comments. In the initial stages of this project, we

have benefited from conversations with Eser Kandogan, Ben Shneiderman, and members of the Research

Division of IBM. We thank Rosemary Humberstone and Christian Roessler for excellent research assistance.

Nisvan Erkal gratefully acknowledges funding from the Australian Research Council (DP0987070) and the

Faculty of Business and Economics, University of Melbourne. The views expressed in this paper do not purport

to represent the views of the United States Department of Justice.

1. For example, in the U.S., the National Cooperative Research and Production Act (NCRPA) of 1993

provides that research and production joint ventures be subject to a ‘rule of reason’ analysis instead of a

per se prohibition in antitrust litigation. In the E.U., the Commission Regulation (EC) No 2659/2000 (the EU

C2014 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume23, Number 1, Spring 2014, 149–177

150 Journal of Economics & Management Strategy

same time, economics research has studied the private and social incentives to have

knowledge sharing arrangements, focusing on issues of appropriability and spillovers.

However, none of these studies has focused on the basic dynamics of private sharing

incentives. Research projects in industries such as biotechnology, automobiles and com-

puters can take years or even decades to complete. Over such long time horizons, firms

may decide to share some intermediate steps, but not all of their research outcomes.

Consider, for example, the collaboration between GM and Toyota to develop fuel cell

technology for automobiles. In 2006, after more than 6 years of working together, the

two companies ended their collaboration because they could no longer agree to terms

for sharing intellectual property.2

Focusing on the dynamics of research, we ask how the incentives to license re-

search outcomes to rivals change over time as a research project approaches maturity.

A question central to the policy debate, as well as the study of knowledge sharing ar-

rangements, is the impact of competition on cooperation. This is because in many cases,

the most suitable research partner for a firm may be one of its competitors. However, as

in the case of GM and Toyota, such sharing poses especially difficultchallenges because

it may reduce the commercial value of the firms’ R&D efforts.3A dynamic perspective

allows us to analyze the impact of competition on cooperation in two different ways.

We can analyze the impact of both how close the firms are to product market compe-

tition and how intense that competition is. Our results reveal an interesting interaction

between these two factors.

From a dynamic perspective, the process of research is generally characterized by

a high level of uncertainty in the beginning. For example, at the outset of research on

a new medical drug, the expected success rate may be as low as 2% and the expected

time to market may be more than a decade.4Similarly, fuel cell technology for automo-

biles has been in active development since the 1990s and is not expected to reach full

commercial viability for another decade.5In such environments, progress in research

can be described as a decrease in the level of uncertainty that researchers face. One of

the novel aspects of this paper is to analyze how firms’ incentives to share research out-

comes change during a research process as the level of uncertainty they face decreases.

We show that the impact of uncertainty on firms’ sharing incentives depends on the

intensity of product market competition.

We assume that research projects consist of two sequential steps. Researchers can-

not earn any profits before completing both steps of the project. An important feature

of the model is that the research steps are symmetric in all respects except in regards to

how far away they are from the end of the project. We deliberately assume that there are

Regulation) provides for a block exemption from antitrust laws for researchjoint ventures, provided that they

satisfy certain market share restrictions and allow all joint venture participants to access the outcomes of the

research.

2. See “GM and Toyota end collaboration on fuel cells” at http://www.businessrespect.net/page.php?

Story_ID=1537. As another example, consider alliances in biotechnology.Lerner and Merges (1998)findthat

while in a few cases the alliances covered technologies well along the way to regulatory approval, in most

cases they were arranged at the earliest stages of research(prior to animal studies, clinical trials, and regulatory

approval).

3. Empirical evidence suggests that firms do take measures to avoid opportunistic behavior when they are

collaborating with their competitors. For example, Oxley and Sampson (2004) show that direct competitors

choose to limit the scope of alliance activities. Majewski (2004) shows that direct competitors are more likely

to outsource their collaborative R&D.

4. See Northrup (2005).

5. For a timeline, see “Fuel Cell Electric Vehicles:The Road Ahead” available at http://www.fuelcelltoday.

com/media/1711108/fuel_cell_electric_vehicles_-_the_road_ahead_v3.pdf.