7. Concluding remarks
This paper provides some of the first insights into the incentives of suppliers and manufacturers to form vertical R & D networks. Building a model of endogenous network formation, we have shown that vertical R & D networks may depend not only on the nature of vertical relations but also on the extent of bi-directional spillover effects arising between manufacturers and their suppliers. More specifically, when vertical relations are non-exclusive, the complete network emerges in equilibrium and maximizes social welfare. When vertical relations are exclusive, however, we find that different network architectures emerge in equilibrium as the spillover differential between manufacturers and their suppliers varies. Yet it appears that only one architecture – the complete network – maximizes welfare. We may conclude that private and social incentives to form R & D networks always align when vertical relations are non-exclusive, but may conflict when vertical relations are exclusive, providing new insights into the stability and efficiency properties of vertical R & D networks. What are the policy implications of these findings? Antitrust law in the U.S. and the E.U. assesses exclusive relations in a relatively lenient way, using in some cases a rule of reason analysis which aims to balance pro-competitive and anti-competitive effects (Federal Trade Commission, 2016; Galarza et al., 2012). In the current setting we have shown that when vertical relations are exclusive, the equilibrium R & D network is ‘under-connected’ if the spillover differential between manufacturers and their suppliers is sufficiently large. Intuitively, when vertical relations are exclusive, there are two competing vertical chains and each supplier charges a specific input price to the corresponding manufacturer. Such input prices serve to relax competition at the upstream market tier, but under certain circumstances they tend to reduce overall welfare. What this implies is that stricter regulation of exclusive vertical relations may be desirable from a social viewpoint if the spillover differential between manufacturers and their suppliers is sufficiently large. By contrast, when vertical relations are non-exclusive, private incentives to form R & D networks are aligned with societal ones, implying that a laissez-faire type of policy might be preferable in that case.
