Academic journal article Economic Inquiry

Cooperation Spillovers and Price Competition in Experimental Markets

Academic journal article Economic Inquiry

Cooperation Spillovers and Price Competition in Experimental Markets

Article excerpt


Both competition and cooperation are important for the successful functioning of many economic systems. For example, firms compete in markets but they also cooperate with one another through arrangements such as research joint ventures, lobbying, cooperative marketing agreements, and strategic alliances.

In this paper, we use experiments to examine how competitive interactions affect agents' propensity to cooperate. We are interested in studying spillovers that may involve cooperation in one domain (such as a research joint venture) and competition in another (such as in a market). (1) Cooperation could weaken competition, perhaps promoting collusion, or market competition could reduce incentives for non-market cooperation. These "behavioral spillovers" could go in either direction. They are distinct from another type of spillover, through knowledge externalities that occur in research and development (R&D) when the innovator cannot fully appropriate the gains to innovation, leading potentially to a socially inefficient level of research (deBondt 1996). (2) As discussed below, behavioral spillovers have been shown in experiments to increase cooperation in otherwise competitive environments, for example through establishing cooperative precedents.

A large body of theoretical research has focused on firms cooperating in research joint ventures and how this impacts competition in output markets. For example, Cooper and Ross (2009) examine the mechanism by which agreements to cooperate in one market can have negative effects on competition in other markets, even in situations when these markets are not linked via costs or demand. Cabral (2000) shows that product market prices are affected by R&D agreements between firms. Caloghirou, Ioannides, and Vonortas (2003), Lambertini, Poddar, and Sasaki (2003), and Poyago-Theotoky (2007) also discuss the impact of forming research joint ventures on product markets and cartel formation. (3)

Empirical work using field data has provided creative indirect evidence on the collusive potential of research joint ventures by exploiting natural "policy experiments," although the extent of this evidence is limited. Goeree and Helland (2010), for example, show that research joint ventures facilitate collusion because they became less popular following an enforcement policy change (leniency) that made collusion less attractive. Policy experiments such as these are often required since systematic collusion often goes undetected by authorities. Duso, Roller, and Seldeslachts (2010) also examine the link between research joint ventures and collusion, using data from the U.S. National Cooperation Research Act that granted certain research joint ventures milder antitrust scrutiny. They find that horizontal research joint ventures lead to more collusion than vertical joint ventures. Our work provides complementary and more direct evidence, since in the laboratory we can observe the level and sustainability of tacit and explicit collusion and can therefore circumvent the measurement and endogeneity issues that are often prevalent in field data.

The specific research goals of this study are the following. First, we wish to examine if agents take advantage of available gains from cooperation in the presence of payoff uncertainties that arise from stochastic innovation success. Second, we are interested in learning if a behavioral spillover of cooperation can lead to collusion in markets, or whether competition in markets reduces non-market cooperation. These notions of cooperation concern contributions to joint R&D projects or collusion in price setting, and are defined independently of any communication opportunities. Therefore, our third goal is to determine how this interaction between cooperation and competition is affected by the introduction of non-market communication opportunities. Finally, we will measure the externalities from R&D cooperation to non-innovators in the market. …

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