Licensing in the Theory of Cooperative R&D

The Case Of No Licensing

Consider an economy with two firms, called firm 1 and firm 2. Assume that these firms can produce a homogeneous product with a technology corresponding to the constant marginal cost of production . Both firms do R&D and each of them tries to reduce the cost of production to c, which is assumed to be zero for simplicity. However, success in R&D is uncertain. Assume that p and (1− p) show respectively unconditional probability of success and failure in R&D. We assume that both firms face the same probability of success in R&D. Assume that each firm affects the probability of success in R&D through its own R&D investment, i.e., p(x_i), i = 1,2, where x_i is firm i’s R&D investment. We consider that , , and for i = 1,2. We further assume that there are no fixed costs related to production and R&D.