R&D networks among suppliers and manufacturers

- R&D networks among vertically related firms are common empirically.
- We develop a model to study the formation of R&D networks among manufacturers and their suppliers.
- Private and social incentives to form vertical R&D networks align when vertical relations are non-exclusive, but may conflict when vertical relations are exclusive.
- We discuss policy implications in terms of antitrust regulation of exclusive vertical relations.

Empirical evidence documents that R&D networks among vertically related firms are very common. Yet there is currently no formal modeling of such networks. In this paper, we develop a model of R&D networks among manufacturers and their suppliers in order to examine which network architectures emerge in equilibrium, and what their implications are from a welfare viewpoint. Our analysis reveals that private incentives to form R&D networks align with societal ones when vertical relations are non-exclusive, but may conflict when vertical relations are exclusive. In terms of policy, stricter antitrust regulation of exclusive vertical relations may, under certain conditions, be desirable from a social viewpoint.