Review of Industrial Organization (2006) 28:129–144 © Springer 2006
Market Power and Incentives to Form Research
ELIANE P. CATILINA
and ROBERT M. FEINBERG
Department of Economics, American University, Washington DC 20016, USA
Author for correspondence. E-mail: firstname.lastname@example.org
Abstract. It is well known that instability is a limit to the formation of cartels, and that
some synergies are required to give cartel members an advantage over outsiders. In this
paper, we explore theoretically the linkage between cost-reduction alliances (like research
joint ventures) and the formation of cartels. The former have negative external impacts
on outsiders, while the latter have positive external effects on outside (independent) com-
petitors. We ﬁnd that when the decisions to join both are made simultaneously the cartel
can be proﬁtable and stable for a smaller number of members than previously found for
cartel formation alone by Salant et al. (1983, Quarterly Journal of Economics 98, 185–
199). This result follows both for open membership and exclusive membership rules, and
suggests a possible anticompetitive impact of research joint ventures.
Key words: cartel, group formation, RJV.
JEL Classiﬁcations: D21, D43.
Starting in the early 1980s, concern with declining US industrial competi-
tiveness in world markets – and envy of European and Japanese compet-
itors for their (then) success in investment, R&D, and productivity gains
– led to calls for the encouragement, if not outright subsidy, of research
activities by US ﬁrms. In particular, joint research activities – research
consortia – were seen as a possible solution. At the time, not much was
made of the widely-held view (especially by industrial organization econo-
mists) that these foreign competitors also tended to have less competitive
markets than those faced by most US ﬁrms.
It was acknowledged that
cooperation by ﬁrms in research activities could potentially lead to coop-
eration/collusion at the output stage – or at least the perception of collu-
sion from the standpoint of antitrust authorities – but the solution seen
See for example, Competitiveness Policy Council (1992), Dertouzos et al. (1989),
Melese and Michel (1990) and Romer (1993).