The impact of price dispersion on R&D network formation

Abstract We develop a two-stage oligopoly model of price competition in markets with both informed and uninformed (captive) consumers. The model introduces a novel mechanism through which interfirm collaborative R&D influences market outcomes. In particular, the second stage of the game where firms set prices is a supermodular game allowing us to analyze strategic complementarities in pricing behavior. We show that this type of market friction creates a new channel of influence for collaborative R&D. Our analysis reveals how consumer heterogeneity and cost heterogeneity jointly shape the incentives for collaboration among firms, offering new insights into the design of efficient innovation networks in oligopolistic markets.