Is R&D cooperation a steppingstone to collusion?

By 3 November 2013 51

European Commission

In 2010, the European Commission has revised its rules for the assessment of co-operation agreements between competitors. Some of these so-called “horizontal agreements” have the potential to reduce competition (and thus harm consumers); it is certainly so when the agreements involve price fixing or limiting production; such agreements are clearly prohibited. On the other hand, other types of agreements may promote innovation and competitiveness and should then be facilitated. This is the rationale behind the Block exemption of R&D agreements:

Since cooperation on R&D generally helps to promote the exchange of know-how and technologies, to facilitate technical and economic progress, and to rationalise the manufacture and use of products that benefit consumers among others, this Regulation exempts not only agreements the primary object of which is R&D but also all agreements directly related to and necessary for the implementation of cooperation in R&D, provided that the combined market share of the parties does not exceed 25% of the relevant market.

On the other hand, the Regulation does not apply to agreements that are not indispensable to attaining the positive effects mentioned above.

Ideas

In 2010, the Commission has extended the scope of this regulation:

With a view to facilitating innovation in Europe, the Commission has considerably extended the scope of the R&D Block Exemption Regulation, which now not only covers R&D activities carried out jointly but also so-called ‘paid-for research’ agreements where one party finances the R&D activities carried out by the other party. In addition, the new Regulation gives parties more scope to jointly exploit the R&D results.

This policy is clearly supported by the economic theory. As I explained it in a previous post (see also Belleflamme and Peitz, 2010, p. 498-99), when comparing different modes of organizing R&D activities among firms active on the same market, the mode that dominates (in terms of propensity for R&D, firms’ profits, consumer surplus, and thus social surplus) is an R&D agreement such that firms not only coordinate their R&D decisions but also share their information completely so as to eliminate duplication of effort.

It must be stressed, however, that this conclusion holds provided that firms act non-cooperatively on the product market. If, on the contrary, cooperation in R&D paves the way for collusive behaviour in the product market, then the block exemption of R&D agreements may not be such a good policy tool. Competition authorities would face a trade-off between enhanced innovation and reduced competition.

collusion

It is therefore crucial to assess to which extent R&D agreements may facilitate collusive behaviour. As explained in Belleflamme and Peitz (2010, Case 18.4, p. 502), answering empirically this question is extremely difficult, as it requires one to isolate the impact of the returns to collusion on the decision to join an R&D agreement from the other factors determining this decision.

Sovinsky and Helland (2012) have found a clever way around this difficulty. They exploit the variation in Research Joint Ventures (RJV) formation generated by a quasi-experiment that affects the collusive benefits of an RJV while not directly affecting the research synergies associated with that venture. Their identification strategy is simple: if product market collusion is not a motivation to form an RJV then, after controlling for firm, RJV and industry characteristics, the propensity to enter into an RJV should not be impacted by changes in the antitrust policy aimed at deterring collusion in the final goods market.

The change in antitrust policy that the authors consider took place in 1993 in the US: at that date, the revision of the so-called ‘leniency policy program’ made it more attractive for cartel members to report illegal behaviour, thereby making collusion harder to sustain. The authors apply their analysis to three industries: petroleum manufacturing, computer and electronic product manufacturing, and telecommunications. These industries share two characteristics: RJV participation is very high and there is a history of antitrust suits.

The results drawn from their econometric analysis suggest that R&D cooperation can indeed be seen as a steppingstone to collusion:

We find that the decision to join a RJV is impacted by the policy change and that this impact is very significant across relevant market definitions. Specifically, we find that the revised leniency policy reduces the average probability that telecom firms join a given RJV by 34%; the reduction among computer and semiconductor manufacturers is 33%; and among firms in petroleum refining the probability decreases by 27%: Our results are consistent with RJVs serving (at least in part) a collusive function.

In view of these results, which policy should competition authorities follow? Was it really a good idea to extend the scope of the R&D block exemption in the EU? Are there other remedies to this problem? I’d be happy to hear your views about that issue.

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51 Responses to Is R&D cooperation a steppingstone to collusion?

  1. Benjamin Croix 19 October 2016 at 21:12 #

    We are facing a dilemma with those ‘new’ exemptions. They might spure innovation but they make collusion easier which is not good for consumers. On one hand, we have an externality created by the collusion of the firms and on the other hand, we have another one created by the lack of innovation.

    The purpose of the European laws is to assure the optimization of the social welfare within the european territory, or we hope so… The condition to accept the new exemptions was that the increase in innovation will create more welfare than the loss induced by the possible collusion.
    In each market structure, collusion is more or less plausible. We can translate this probability within a variable called ‘pC’. For example, a very concentrated market with a demand growing is more likely to have a large ‘pC’, such as the SmartPhone market.

    And we can do the same with the probability that in a defined market, innovation will be spurred by cooperation beetween firms. We can call this variable ‘pI’. As explained in the article ‘R&D cooperation or competition’ (1), markets with larger spillovers are more likely to encourage cooperation for R&D.

    The European Commission should study market-by-market, and recalculate utility functions with the new variables ‘pC’ and ‘pI’ and see if the condition defined above is fulfilled.
    The inconvenient is that it is hard to define relevant markets, and even more to make empirical studies to observe the effects on collusion or innovation. Such a survey would require a lot of efforts and ressources which in the end might be larger than the loss created by possible collusion.

    Maybe the European Commission should more focus on fighting against collusion in a larger scope than cooperation for innovation by itself. If there was no incentive to collude at the first place, innovation would not have a large effect on collusion. Nevertheless, The EC can watch more strictly the markets where cooperation for R&D is largely used. This may be translated into a new variable affecting positively the ‘discount factor’.

    Some new projects have been established to spure innovation such as ‘Horizon 2020′(2). This encourages even more cooperation, between private and public sector. Maybe cooperation is one of the best ways Europe has found to encourage innovation.

    -(1) Belleflamme, Paul, ‘R&D cooperation or coordination’, 2010, http://www.ipdigit.eu/2010/09/rd-cooperation-or-competition/, visited on the 19/10/2016

    – (2) European Comission, What is Horizon 2020 , https://ec.europa.eu/programmes/horizon2020/en/what-horizon-2020, visited on the 19/10/2016

  2. Yuhan Zhang 19 October 2016 at 20:26 #

    As far as I am concerned, the competition authorities should follow a case-by-case basis instead of general prohibition or exemption regulations. According to Johannes Johnen*, modern competition policy increasingly uses a case-by-case approach and there are fewer bans of practices but more investigations in the actual situation, which requires good economists to do these investigations.

    Tomaso, Lars-Hendrik and Jo (2014), using information from the U.S. National Cooperation Research Act, find robust evidence that large networks between direct competitors, created through firms being members in several RJVs at the same time, are conducive to collusive outcomes in the product market that reduce consumer welfare. By contrast, RJVs among noncompetitors are efficiency enhancing. These results suggest that it is important for competition authorities to at least distinguish whether the participants of the RJVs are direct competitors or not first before deciding whether to facilitate the cooperation.

    Furthermore, even though RJVs might serve a collusive function, it is not necessarily harmful for social welfare. Hinloopen, Smrkolj and Wagener (2013) examine the trade-off between the benefits of allowing firms to cooperate in R&D and the corresponding increased potential for product market collusion utilizing a dynamic model of R&D whereby they consider all possible initial marginal cost levels (technologies), including those that exceed the choke price. They show that an extension of the cooperative agreement towards collusion in the product market is not necessarily welfare reducing: if firms collude, they (i) develop further a wider range of initial technologies, (ii) invest more in R&D such that process innovations are pursued more quickly, and (iii) abandon the technology for a smaller set of initial marginal costs. Therefore, extending the scope of the R&D block exemption, which might facilitating collusion, can still be welfare enhancing, which calls for detailed case-by-case analysis.

    Also, the criterion of the exemption regulation should be examined carefully before considering about extending it further. For example, according to Richard and Bruno (2014), the exemption regulation should be simplified by withdrawing the market share criterion as limiting the exemption to low market shares(combined market share of the parties not exceed 25% of the relevant market) is not well-grounded. They examine the theoretical basis for this criterion by extending existing models so that a subset of firms innovates and participates in an R&D cooperation agreement. They identify one, the outsider effect, that can lead firms to increase R&D under cooperation precisely when their combined market share is high. In a general model in which all firms innovate, they also find that R&D agreements can be more beneficial at higher market shares. Thus the limitation ruling out the agreements with a high combined market share can hinder desirable cases, which is inconsistent with the goal of facilitating innovation.

    * Dr. Johannes Johnen in LECON 2370: Industrial Organization and Competition Policy course Introduction class at the Université Catholique de Louvain, 2016.

    Bibliography:
    1. Tomaso,D.,Lars-Hendrik,R.&Jo,S.(2014). Collusion Through Joint R&D: An Empirical Assessment. Review of Economics and Statistics,96(2),349-370.
    http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00367#.WAeoTPl94dU
    2. Hinloopen,J.Smrkolj,G.& Wagener,F.(2013).In Defense of Trusts: R&D Cooperation in Global Perspective.CeNDEF Working Papers 13-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    https://ideas.repec.org/p/ams/ndfwpp/13-05.html
    3. Richard,R.& Bruno,V.(2014).Market shares, R&D agreements, and the EU block exemption. International Review of Law and Economics,37,15-25.
    http://www.sciencedirect.com/science/article/pii/S0144818813000343

  3. Céline de Vos 19 October 2016 at 19:59 #

    My first impression with the idea of the Commission to extend the scope R&D block exemption in the EU is positive because it will increase the social welfare.
    The new regulation is now not only covering R&D activities but also “paid-for research” agreement. Due to this extension, the innovation will be fostered in small firms. Indeed big firms are not the more innovative ones, for example “40% of new drugs from big farma is originated in SME”s (LSMS2040 innovation management, source: Ernst & Young, quoted in The Economist June 4th 2005; Fortune March 20, 2006, p.82.) This extension is then necessary to foster innovation in all firms.
    Now we can ask if the limitations of the Commission to prevent the emergence of collusion are sufficient. Maybe competition authorities should become more threatening, increase the reward of deviation etc.

    My opinion is that the Commission was right about this extension of the regulation! It would increase the total welfare and foster innovation more than reducing the competition and encouraging collusion.

  4. Hiben Kevin 19 October 2016 at 16:12 #

    I have a mixed opinion about the impact of R&D cooperation. For me the authorities have to be very careful about their regulations and its stakeholders because the first involved are the big firms wanting always more profits and I think that these new policies promote the cooperation between these big firms to the detriment of smaller firms or SMEs. According to me 25% is so a too high percentage for the combined market shares of the parties in the relevant market.

    This is already big companies which strongly dictate the behaviour of the economy so I am wondering if the fact that authorities allow some form of agreement will not encourage these firms to join to expand even more this control. Good or bad cooperation is still cooperation and in this case it would be the power of innovation that would be involved. Big companies are already controlling the innovation and linked consumption with planned obsolescence.
    These regulations are good but I think that we need to take other initiatives and to brake firms having more and more power on the consumption market and its repercussions (health, …). According to me the risk of collusion is thus big and between the “bad” parties (big companies).

    On another side this is true that these regulations encouraging the “good” cooperation seem to be good at the first sight for the innovation according by the economic theory.

  5. Martina De Luca 19 October 2016 at 13:09 #

    It might be obvious, but my opinion on the subject is that the market needs a regulation on competition to avoid hidden cartels and creation of monopolies, which the consumers will suffer from. As the Vice President of the Commission for competition policy, Joaquín Almunia, said it is vital for firms to exchange research and development with particular agreements to increase innovation, but it is also necessary to minimize the risk of harm consumers and competition.

    I think the limit of 25% of the market share imposed by the regulation may hide some traps; we must always consider the type of market we are facing. In fact, in a less exploited market there might be fewer firms, each of which owns a high percentage of the market: in this case letting them secure agreements might not change their share very much.
    However, if we deal with a very fragmented market with lots of small firms, an agreement in R&D between two of them owning a small percentage of the market could lead them to increase significantly their share. Therefore, I believe the regulation should be differentiated according to the type of the market, even though I am aware of the fact that it presents an enormous complexity of different precautions.

    Another suggestion to policy competition is that authorities could provide incentives for those firms that, secured an R&D agreement with another firm, are really enriching the innovation on the market and are competitive indeed. It is generally known that highly competitive products on the market increase consumers’ welfare since they can choose among a bigger range of products and have better quality. An incentive to those firms that are able to do so would be a push for the others to act the same way. This solution requires though a high presence of policy competition authorities on the market for them to monitor carefully which agreements increase competition and which facilitate collusion.

    My conclusion is that R&D agreements must be implemented when their real purpose is to increase competition in the market and innovate for the benefits of society; when this does not happen, punishments for the collusive firms have to be inflexible.

  6. Bertin Pierre 18 October 2016 at 13:01 #

    According to me, the commission made the right choice when decided to extend the scope of the regulation about R&D agreements in 2010 because not only the firms need innovation to survive but the whole society needs it too.
    We are facing some of the biggest challenges of the human history such as global warming, resource scarcity, etc. And innovation is one of the best ways to deal with those challenges so helping firm to innovate is a crucial goal for the society.

    Indeed with the emergence of many innovative start-up in Europe it will be very helpful that big companies can now make « paid-for research » agreements with them.
    The hypothetical innovation will be easier to develop and implement thanks to this regulation and will increased the surplus of both the firms and the consumers by reducing the production cost or by increasing the efficacy of the products/services.

    Of course the big issue with this regulation is that it will help malicious firms to collude.
    My belief is that the commission must add strict requirements to minimize the risk of collusion while maximizing the probability of innovation.

    One of those strict criteria that firms need to fulfil is to have a combined share on relevant market smaller than 25%. So that even if the risk of collusion is real, it will be difficult for the cooperating firms to make a price agreement without being outperformed by the other competitors on the market or detected by the comission.
    I will not develop every guideline and regulation that the commission imposes to the firms making a cooperation agreement but their aim to minimize the risk of collusion while making innovation easier. Yet even if the commission is looking to do the best, those guidelines and regulation may not be enough and the commission may have to do a case-by-case assessment and adds specific rules for specific market.

    As a conclusion, I strongly believe that this regulation is useful but that the commission as to be very careful when she shall give its agreement to firms to let them cooperate in order to maximize the probability of innovation while minimizing the probability of collusion.

  7. Robert Heyse 14 October 2016 at 18:13 #

    I believe that R&D cooperation is generally speaking beneficial to both the firms conducting it and society as a whole, because it solves problems such as the duplication of R&D efforts and leads to more innovation. As Sovinsky and Helland (2012) have proven, it may lead to collusion. However, I believe that this is not necessarily the case in all situations and that public authorities can take measures to alleviate the problem of collusion.

    First of all, I would argue that a distinction between different types of RJVs must be made. A study from Duso et al. finds that while RJVs between direct competitors can indeed be linked to collusion, RJVs between non-competitors are more likely to only be efficiency enhancing. Moreover, it has been shown that the likelihood for collusion is positively correlated to both size of the participating companies and size of the horizontal network that is created through the RJV. Below a critical network size, the created efficiencies make up for the possible losses through collusion, so that a consumer surplus is still maintained. Knowing this, public authorities can focus their resources on large horizontal RJV networks. This will make them more efficient in identifying collusion and thus lead to welfare gains. (Duso et al. 2012)

    Another measure that public authorities can take is to simultaneously tighten the laws for product market collusion when relaxing the laws for R&D cooperation. This will reduce the incentives for colluding while making it easier for law-abiding companies to engage in R&D cooperations. Furthermore, the additional welfare gain that is created by laws that incentivize R&D cooperation can justify an increased spending for measures against collusion.

    In conclusion, I believe that measures by public authorities such as the block exemption of R&D agreements in Europe generally are beneficial to society, but only when sufficient anti-collusion efforts are taken at the same time.

    Sources:

    Duso et al. (2012), “Collusion through Joint R&D: An Empirical Assessment”, Heinrich-Heine-Universität Düsseldorf, URL: http://www.dice.hhu.de/fileadmin/redaktion/Fakultaeten/Wirtschaftswissenschaftliche_Fakultaet/DICE/Discussion_Paper/079_Duso_Roeller_Seldeslacht.pdf

  8. Lachapelle Nathan 9 October 2016 at 13:14 #

    I would like to contribute to this question “In view of these results (namely that R&D cooperation can indeed be seen as a steppingstone to collusion), which policy should competition authorities follow? Was it really a good idea to extend the scope of the R&D block exemption in the EU? Are there other remedies to this problem?”

    I believe that R&D cooperation can be “good”, there are a few of reasons why we could gain from the exchange of information and knowledge. One of them, is well know: most of the knowledge is shared informally (the know how, the experience) and thus allowing R&D cooperation would foster this phenomenon, and I believe this can be good.
    There is also the fact that if two firms combine their resources of R&D, they have some costs that they would split between them: one “research lab” instead of two, fixed costs shared, one research team, with only one research department, only one “chief”,… and so on.

    It can also alleviate price war, which in the Bertrand setting lead to the zero profit situation. This would lead to the collapse of firms (here I assume that if firms make no profits in the long run, there is no point for them to stay). So this situation would mean fewer firms on the market, a situation that might mean oligopoly/monopoly and this situation is far worse than a situation where R&D cooperation occurs with more firms (it could also lead to fewer innovations since a monopoly has less incentives to innovate than a competitive firm when he is not threatened by entry or when he cannot perfectly appropriate his return of innovation (1)).

    The side effect of R&D cooperation would be the collusion; what I would call the “ugly”. Since there is evidence that it could happen (2), one might think of a solution.
    Hence, the state is there to step in when the market fails, so to me there are various ways of how the governments could offset the increase in the likelihood of collusion.
    I will now review a few things that could deter collusion and where there is room for government’s intervention.

    First, there are two obvious ways of fighting collusion: harsher punishment if collusion is spotted and the leniency programs (3).

    Secondly, the more firms on the market the more difficult it is for a group of firms to collude. With that, there is also the fear of entry that would make collusion less likely and gives incentives to break cartels (4).
    There is a clear role for the government, which is to facilitate entries on the market (by, for instance, reducing and fighting the barriers to entry).

    Since, the ugly can be corrected, we can assume can the good would overweight the ugly corrected and thus R&D cooperation may be a good thing after all.

    I hope I have contributed to a better – yet modest – understanding of the debate.

    (1) BELLEFLAMME P., PEITZ M. (2010), Industrial organization: Markets and Strategies, Cambridge university press
    (2) SOVINSKY M. HELLAND Helland E., (2012), Do Research Joint Ventures Serve a Collusive Function?, (page consulted on 9/10/2016)
    http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2013/twerp_1030_sovinsky.pdf
    (3) http://ec.europa.eu/competition/cartels/leniency/leniency.html
    (4) http://ec.europa.eu/competition/mergers/studies_reports/the_economics_of_tacit_collusion_en.pdf

  9. Guillaume Duckerts 14 October 2015 at 11:29 #

    From the book Collective Dominance and Collusion : Parllelism in EU and US Competition Law, it appears that cooperation or some kind of collusion is often needed for firms in order to achieve innovation. It is also noticeable that the increase (or loss) in welfare for the society as a whole depends, amongst other things, from the sequence between stages of collusion and cooperation and stages of non-agreement between the firms.

    It is also agreed that when collusion is followed by price competition à la Bertrand, the result is the best way for the society. Indeed, consumers enjoy better products as well as best prices. If collusion happens in some kind of competitive market, the result is unpredictable and we haven’t studied all the inherent notions for a good understanding here.

    The observations here below confirm the fact that R&D agreements should be facilitate on the condition that competition remains after. In my opinion, the extent of the legislation to paid-for-research agreements might lead to more collusive networks than before under the existing legislation. Indeed, in most of the cases, big firms will pay for small firms to conduct research for them, and those small firms are likely to be absorb by big players than in the case were cooperation in R&D happens between important actors on the competitive markets.

    Filippelli M., 2013, Collective Dominance and Collusion : Parllelism in EU and US Competition Law, Edward Elgar Publishing

  10. Mathilde Castadot 14 October 2015 at 11:11 #

    At the end of this article, Mister Paul Belleflamme asks us three different questions which are: “In view of these results, which policy should competition authorities follow? Was it really a good idea to extend the scope of the R&D block exemption in the EU? Are there other remedies to this problem? I’d be happy to hear your views about that issue”
    I will try to answer at each in the following subsections with my own view supported by different arguments founded in scientific and economics articles.

    First of all, in view of these results, the competition authorities should follow a particular policy that maximizes the social welfare. As mentioned in the article, the research joint venture plays an important role in the innovation game. The companies participate and cooperate on the R&D of others companies to promote exchange of know-how, increase efficiency and promote non-drastic innovation. That has a positive impact on the social welfare. So, the answer of the first question should be: the competition authorities should follow a policy who encourage all the research joint venture (RJVs)
    However, cooperation at the R&D stage could lead to coordination in the product market and this could lead to collusion and tacit agreements. The collusion leads to a monopolistic situation during a certain time if firms do not deviate and that has a negative impact on the social welfare.
    So the ideal regulation to follow should be a regulation between the two extremes: the maximization of the R&D cooperation and the minimization of collusions.
    In my opinion, the ideal regulation must not concentrate on “horizontal agreements”. In different researches they show that RJV’s between direct competitors are conducive to collusion.
    « We find robust evidence that large networks between direct competitors –created through firms being members in several RJVs at the same time – are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing ».
    Furthermore, this RJVs will create important networks who will facilitate collusion. “Empirically, we estimate the horizontal network size above which it becomes problematic in terms of collusion when it includes 18% or more of its direct competitors.”

    Secondly, I find personally that the competitions authorities can extend the scope of the Block exemption of R&D agreements in the EU provided that the firms are not allowed to cooperate the product market.
    “First, RJVs can be facilitating vehicles which create common assets – and therefore common interests – among participating firms and therefore provide a new credible punishment device (Cabral, 2000; Martin, 1995).
    Second, through the sharing of research findings, RJVs may reduce cost asymmetries among firms and hence make product market agreements more stable (Miyagiwa, 2009).
    And third, RJVs can be used for the transmission of information to signal cooperative behavior (Cooper and Ross, 2009). These theoretical arguments thus show that there are various channels through which R&D collaboration may facilitate product market coordination.”

    Finally, other remedies exist to this problem, to prevent the formation of collusive networks. The competition authorities should keep in mind the market shares of the participating firms.
    According to Tomaso Duso, Lars-Hendrik Röller and Jo Seldeslachts, if the insider’s market shares decreases, compared to non-participating rivals that could be a proof of a collusion behavior. “A lower insider market share is also necessary and sufficient for decrease in consumer welfare”.
    Moreover, according to Michelle Goeree and Eric Helland, if the government strengthens the leniency program, it could decrease the R&D collaboration which lead to collusion. “The underlying idea is that firms use RJVs as a collusive too, then tougher antitrust sanctions should make firms more cautious […] If product market collusion is not a motivation to form an RJV, they argue, the propensity to enter into an RJV should not be affected by this change.”

    I hope that you have appreciated my work, mainly inspired by articles and scientific researches to the issues of Paul Belleflamme.

    Bibliography :

    1) Duso T. , Röller L-H. and Seldeslachts J. : “Collusion Through Joint R&D: An Empirical Assessment”, The review of economics and statistics, May 2014, Vol. 96, No. 2, Pages 349-370

    2) Goeree M. and Helland E. “Do Research Joint Ventures Serve a Collusive Function?” Institute for Empirical Research in Economics Working Paper Series, 2010

    3) Pennings E. , Duso T. and Seldeslachts J. : “On the stability of research joint ventures: Implications for collusion” , Review of Business and Economic Literature, 2012, Vol. 57, No. 1, Pages 98-110

    4) Suetens S. “Does R&D cooperation facilitate price collusion? An experiment.” , Journal of Economic Behavior & Organization,

  11. Brieuc Tollenaere 7 October 2015 at 17:00 #

    First of all, as stated in the article « is cooperation a steppingstone to collusion ?», those two terms have an opposite impact for the consumers but can be linked somehow. Indeed, a perfect competition (no collusion) leads to maximize the consumer’s surplus. Decreasing this competition (if firms begging to collude on the market) would have the opposite impact (a negative one). On the other hand, helping and pushing firms to cooperate (on a R&D level here) would lead to increase this surplus even more because the firms won’t have to do twice the work.

    “if a nation wish to grow economicaly, they should eliminate obstacle to competition”.
    This quote is for me the central argument to answer the question. Indeed, an innovation is always source to many disruption (when your supermarket changes, when you move from one town to another etc.). In that point of vue, cartels or monopolists will have less incentives to innovate. Indeed their opportunity costs are higher thanks to the fact that they will tend to maximize profit by lowering quantities and rising price. The fix costs of innovation and disruption will then be splitted between less quantity.

    The question is then: how to promote cooperation while avoiding collusion?

    To answer this question, my opinion is that the extension of the R&D agreements is constructive and positive but I believe that we could be even more drastic

    The extreme idea that is mine would be to force firms to freely allow other firms to enjoy their innovations and R&D findings. In other words to enlarge even more the scope of R&D block exemption. The idea would be to completely revolutionize the principle of patents. Indeed, I believe that by the fact that a patent confer a (even limited) monopoly rights to the inventor, we could then argue that it is an obstacle to perfect competition and thus to innovation (when thinking of K. Arrow’s arguments).
    My idea is based on it’s idea and on the open source idea that is to say that if someone wants to use my work, he’s free to do so because my work is public knowledge. he is free to modify it as long as he states that I am the one at the beginning of its procedure.

    In conclusion, the competition authorities would have to enlarge the scope of R&D block exemption to a maximum when in the other side, they will need to reinforce the antitrust laws in order to give less incentive for firms to collude.

    1) Paul Belleflamme, Perfect competition, Industrial Organisations class (2013)

    2) http://ageconsearch.umn.edu/bitstream/18374/1/wp020293.pdf : the economics of patents : an overview

    3) Michelle S. Goeree and Eric Helland (2010) “Do Research Joint Ventures Serve a Collusive Function?” Institute for Empirical Research in Economics Working Paper Series

    4) Douglas Clement, “Creative disruption”, 2008, The region

    5)OECD, “Fighting Cartels in Public Procurement”, Octobre 2008, Policy brief

    6) fr.wikipedia.org/wiki/Open_source

  12. Pierre-Ami Maudoux 19 November 2014 at 18:44 #

    When considering the regulation of R&D cooperation agreements, competition authorities face a dilemma. Indeed, on the one hand these types of agreements can potentially increase social welfare, notably by spreading new technologies faster and avoiding double effort. On the other hand, however, research has established a clear link between R&D cooperation and a greater chance of collusion among the firms in the agreement.

    We believe that in face of such a situation, competition authorities should have a balanced approach and design the policy that finds the best compromise between R&D cooperation and free competition on the market. In order to do so, the European Commission should first impose stricter conditions for firms to benefit from the block exemption and thus engage in R&D agreements. One could suggest, for example, that companies which have been recognized to have engaged in collusion schemes in the past 10 years should not be granted the right to sign R&D cooperation agreements with other firms.

    In addition, competition authorities should be cautious when extending the scope of the R&D Block Exemption Regulation and always consider implications of such policy changes on the competitive environment. Regarding the specific case of the 2010 extension of the Block Exemption, one could argue that allowing “paid-for research” agreements might lead to an increased risk of collusion among the firms in the agreement. Indeed, the firm which funds the research could threaten the other firm to stop the funding if the latter undercuts its prices.

    The complementary policy to stricter block exemption conditions would be greater penalties for colluding firms in a R&D agreement. Would it not seem fair to penalise collusion more when it takes place within a context where competition authorities grant firms special exemption rights from competition regulation, which is the case in R&D cooperation agreements?

    Both of these measures, hopefully, should help competition authorities find the best trade-off between greater social welfare obtained by honest R&D cooperation agreements and reduced risk of collusion from stricter penalties for colluding firms in the context of such agreements.

  13. Maxime Verheggen 19 November 2014 at 00:01 #

    Collaboration is a good process to evoluate. Together, we are stronger. But in an economic context it could be harmfull for the consumers.

    In my point of view, the extension of the R&D agreements is very constructive and helpfull for the firms. It is a waste of time to make the same work twice or more times. So R&D cooperation is very important. Besides this new policy gives a very clear and complete purpose of what are the conditions of an allowed cooperation.

    In addition, i think that competition authorities should have a double checking when cooperation occurs to avoid and detect collusion. First one is the agreement of the cooperation based on the block exemption and several rules. Second one will be to keep a look into the process of cooperation.

    At the end, all those measures are to prevent collusion and not to facilitate it. It is necessary to protect the consumer against this.

  14. Alex Angelini 18 November 2014 at 23:55 #

    In my humble opinion it is probably impossible to completely disentangle joint R&D (or RJV) and associated collusive risks in order to identify the latter. R&D investments and all the productive modifications that follow the application of innovative knowledge are more than sufficient – as a façade – to hide from the authorities increases in prices or reductions in output quantities that originate from collusive behaviours rather than innovations.

    Nonetheless, I believe that increasing more than reducing R&D incentives (and thus, for example, extending the scope of the R&D block exemption in the EU) can be considered beneficial for the society. Balancing out the effects, even if collusive agreements associated with R&D harm market and consumers, I believe their repercussions to be of the static kind, while the beneficial effects of innovations are dynamic and have positive consequences that, considered as a flow, outweigh the collusive losses.

    Realistically, taking the question from a different perspective, we could say that the risk of collusive agreements, which can perhaps be reduced but never fully eliminated, is part of the variable costs that society has to bear for acquiring innovation.
    At the same time it is also true that, as the peculiar work of Sovinsky and Helland shows, the literature on collusive agreements is evolving in an unpredictable way, enhanced by collusion itself: the more collusive agreements are identified, the more the literature grows in accordance with the dimension of the sample of cases, overally and hopefully making collusive agreements more difficult to hide, thus more costly and less beneficial for the firms.

  15. Bernard Vonèche 18 November 2014 at 23:51 #

    As mentioned in the article, the scope of the R&D block exemption in the EU has been extended — in 2010 — and I think it was actually a good idea for 3 reasons. First of all, this extension intervenes just after the financial crisis of 2008 and help — but also strongly encourage — companies to pass through the crisis and reinvest in innovation. Secondly, this extension opens the dialog for other businesses (see: http://www.economist.com/node/9474097) that can be interested in such exemption.

    That being said, I think that authorities and policy makers should continue the global direction offered by the R&D block exemption and promote innovation cooperation. However, they should review their copy and change the specific and precise rules or measures relative to the combined market share. Ruble and Versaevel (2013) are going in the same way and state “We argue that existing theory therefore does not support limiting the exemption to low market shares”.

    They showed that by adding a market share criterion (2), only companies with low sales may collaborate together in R&D, the EU Commission’s legislation penalizes the technological collaboration of major players — in the same market. Indeed, when theses majors collaborate and then possess a high combined market share, their horizontal R&D cooperation can become illegal. I think that the regulation focus too much on the market share dimension and loose its original and real purpose, supported by the theory: the R&D block exemption.

    Finally, there are not plenty of other remedies to avoid collusion from R&D cooperation; the last thing I will add to this comment is the idea of a global harmonisation of these exemptions. Already formulated by the EICTA (2000) to “Promote new WTO rules as well as a worldwide monitoring system for R&D support to avoid a worldwide bidding contest”. I personally think this recommendation is more then ever up-to-date and we still have big steps to accomplish on the worldwide harmonisation in support for R&D (and also social and tax regulations but this is not the question here).

    Bibliography:
    1) Richard Ruble, Bruno Versaevel, Market shares, R&D agreements, and the EU block exemption, International Review of Law and Economics, Volume 37, March 2014, Pages 15-25, ISSN 0144-8188, Available at http://dx.doi.org/10.1016/j.irle.2013.04.008.
    2) Commission Regulation EU No. 1217/2010, the R&D Block Exemption, Summaries of EU legislation, Available at http://europa.eu/legislation_summaries/other/l26069_en.htm
    3) EICTA – European Information and Communications Technology Industry Association, EICTA Position On the Revision of the EU rules on State aid for R&D, 2010.

  16. Charlotte Irgens 18 November 2014 at 23:33 #

    In this blog post, R&D cooperation as a potential steppingstone towards collusion is brought up. Two interesting questions are posed: What kind of policy should competition authorities follow in order to mitigate the negative factors around R&D cooperation and foster and facilitate the positive factors? Was it really a good idea to extend the scope of the R&D block exemption in the EU?

    My initial response to the last question is yes, I think it was a good idea to extend the scope of the EU’s R&D block exemption. This because from a social welfare perspective, there are many benefits for society when firms cooperate to innovate. For example there is less duplication of efforts as firms instead of competing against each other to become the first to arrive at an innovation, can pool their resources together and work towards a common goal. With more resources and coordinated efforts, they are more likely to reach the innovation faster. Still, it is clear that such an extension of the EU policy likely could lead to more collusion and anti-competitive behaviour between firms.

    Therefore measures aiming at restricting collusion should be taken, and the EU can look to the antitrust policy that was made in the US in 1993 for inspiration. This antitrust policy made it, as the blogpost explains, more attractive for cartel members to report illegal behaviour. Researchers found that firms’ willingness to do R&D cooperation was reduced after the introduction of this antitrust policy, indicating that the cooperation had in fact been a steppingstone to collusion. The danger with introducing such an antitrust policy is that it will likely limit the cooperation between firms, which could lead to less R&D being performed overall. Therefore, the question, from a social welfare perspective, is what benefits the society the most? Is society better off with less cooperation between firms which would increase cooperation and drive prices down, but also probably reduce the amount of R&D carried out, which would again likely lead to less innovation in society? Or is it better for a society to allow firms to cooperate more so that incentives for them to coordinate R&D efforts and contribute with important innovations in society are made? However, at the same time maybe this allowed cooperation leads to a bit too much cooperation in the product market making firms able to keep prices higher than they would have been in a more competitive market.

    This is obviously a very hard question to answer, as there are good and bad parts on both sides. However, from my point of view, as I see this from a social welfare perspective, I believe that we might have to allow some of this collusion in order to foster innovation. Several researchers have found that social welfare under collusion exceeds social welfare under competitions (See e.g. Deltas et al. 2012). It hence seems as if the benefit society gets from firms coordinating their R&D and the spillover effects this create, is greater and outweighs the loss of social welfare due to the reduced competition.

    Therefore, arguing from a social welfare perspective and for what seems likely to benefit the European societies the most; what I would argue for, is that extending the scope of the R&D block exemption in the EU is mostly a good idea. Nevertheless, it should be taken seriously that this could reduce competition. Introducing some sort of antitrust policy, similar to the one in the US, should be looked into, but policy makers will have to carefully assess how to do this and to what extent as it seems as if society has more to loose from less collusion than less competition.

    Source: Deltas et al. (2012): “Social-Welfare-Enhancing Collusion and Trade”, a book chapter by Deltas, G., Salvo, A. and Vasconcelos, H. in Recent Advances in the Analysis of Competition Policy and Regulation by Harrington, J.E., Katsoulacos, Y., and Regibeau, P., Elgar Publishing, 2012

  17. Carolina Rosero 18 November 2014 at 23:33 #

    Given Sovinsky and Helland’s findings, the European Commission is caught in a situation of needing to balance the benefits of innovation with the costs of collusion. Greater regulations on RJVs will reduce innovation, while fewer regulations will lead to collusive practices and harmful impacts on consumers. With no clear method to boost innovation while simultaneously preventing collusion between competing firms participating in RJVs, the Commission’s best option is to pass regulations based on ongoing economic realities, as well as on the experience of specific industries.

    The Commission should consider the potential benefits from innovation and compare these to the potential costs of collusion, as a cost-benefit ratio, and implement appropriate regulations based on these conclusions. In addition, the cost-benefit may change depending on the current economic events (such as the financial crisis), or government priorities. Thus, whether or not the decision to extend the R&D Block Exemption was wise, can only be determined by comparing the costs to the benefits, which would require more information that is currently available in the readings.

    Two other possible policy approaches could be considered:
    First, the Commission could set industry specific requirements. The R&D Block Exemption Regulation could be applied differently to different industries. Industries with higher production potential, or at a younger phase in the creation of new products, could be prioritized to boost innovation. In other industries where the negative impact of collusion could be more harmful to consumers, Commission could implement regulations which may reduce innovation but would protect consumers.

    Second, revise the regulations in response to firm actions. In addition to being industry specific, the European Commission could impose regulations based on product development cycles. Regulations could enable firms to benefit from RJVs initially, but later be adjusted to prevent collusion, based on observations of pricing and other market practices. A danger however, in this approach, is that revising regulations frequently would create an environment of unpredictability for companies and harm industries in the long term.

  18. Benoît Petre 18 November 2014 at 23:22 #

    Is R&D cooperation a steppingstone to collusion? Should we therefore prevent firms of doing so? Once again, I don’t think that there is a single answer to this question. Indeed firms are very heterogenous and implementing a common policy to all of them on this matter would be inefficient.
    For example, the temptation to collusion is reserved to firms owning large market shares. In fact, collusion is appealing to firms only if it enable them to behave like a monopolist. Such strategy would be impossible to implement in highly splitted market. This element has to be taken into account while reading the conclusions of Sovinski and Helland (2012). Indeed, they used data covering firms working in three highely concentred market (Telecommunication, Petrolum products and computer). Furthermore, they even acknowledge that <> (p.21 of their paper) in their database. Their conclusions may therefore only be true for some specific markets.
    The European Union has take this situation into account while building its policy on this issue. R&D cooperation between firms is allowed as long as their total market share is smaller than 25%. We can always argue on the value of the total market shared (25% seems too small too me) but everyone should agree that this policy will prevent collusion while allowing firms to cooperate in R&D.
    Cooperation in the field of R&D is crucial for technical progress. The added-value of cooperation is so important that most of the european research funds such as Horizon 2020 or ERA-Nets are reserved to projects developped by several firms (source: NCP Wallonie).
    As a conclusion I think that the european policies both spur efficiency by promoting cooperation in R&D and fighting monopoly by allowing such scheme only on some conditions.

  19. Ivan De Meunynck 18 November 2014 at 23:16 #

    In my opinion, competition authorities should follow a policy that increases social welfare (as more or simply better expenses in R&D would enable firms to produce things with better quality at a lower cost, which could in a lower price for consumers) more than it decreases it (as collusions aren’t benefitial for consumers). But there is a crucial detail that must be mentioned: each sector as its own particularities. As a result, I think that a specific policy should be taken in each sector. This would take a lot of time and would nearly be impssible to put in place, but for me, it looks like the only way to achieve an optimal situation.

    The idea of extending the scope of the R&D block exemption in the EU seems very positive to me. In fact, it enables firms to put money in R&D activities that will help them even in the case where they haven’t sufficient material to develop R&D on their own. In addition to this, there much less costs that will be lost in this senario than there would be in a race in R&D research. The only problem I see is that the possibility of collusion is too important to forget to mention it…

    A possible remedy could be to give huge rewards to firms in the collusion if they denunciate the rest, and to impose very big fines as a punishment to the denounced in function of the duration of the collusion.

  20. Rosa Elena Alvarez 18 November 2014 at 23:08 #

    An agreement on price or output that affects consumers is normally forbidden by antitrust laws. By contrast, R&D cooperation is accepted and even encouraged by competition authorities in order to avoid underprovision of R&D and the negative welfare effects that it could produce.
    On one hand, R&D cooperation in the presence of spillovers is generally seems as welfare enhancing.
    On the other hand, R&D cooperation does not necessarily lead to coordination in the product market. Nevertheless, according to Michelle Sovinsky and Eric Helland (2012), cited in this article, R&D cooperation may facilitate coordination in the product market.
    There are many examples of cases in which R&D collaboration lead to anticompetitive abuses:
    Goeree and Helland (2010) gather a number of cases in the petroleum industry, the computer industry, the semiconductor market and in telecommunications.
    Other example, according to Grossman and Shapiro (1986) when the research joint venture stipulates downstream market division for any patents that could result of the venture , or when there are collateral agreements that impose cross-licensing of old patents or a per-unit output royalty for using new patents since this reduce the incentives for firms to increase output.
    Another example, firms can sustain collusion more easily when they participate in multiple markets as compared to the situation in which they interact in one market only.

    Finally, Hagedoon, Link and Vonortas(2000) conclude that “With all their benefits, partnerships have the negative potential to block competition and create various kinds of static and dynamic monopolies _in existing and future markets, respectively”.

    Michelle S. Goeree and Eric Helland (2010) “Do Research Joint Ventures Serve a Collusive Function?” Institute for Empirical Research in Economics Working Paper Series
    http://www.iew.uzh.ch/wp/iewwp448.pdf

    GENE M. GROSSMAN and CARL SHAPIRO (1986) “Research Joint Ventures: An Antitrust Analysis”
    http://www2.dse.unibo.it/barigozzi/corsi/antitrust/GrossmanShapiro_JLEO1986.pdf

    John Hagedoorn , Albert N. Link and Nicholas S. Vonortas (2000) “Research partnerships 1”
    Research Policy.
    http://arno.unimaas.nl/show.cgi?fid=2466

  21. Arpit Agal 18 November 2014 at 23:04 #

    As shown in the blog, theoretically, it is always beneficial to encourage cooperation between firms in the area of research and development. Hence, the new EU regulation seems to be a positive move. But similar to any other policy decision, the major issues comes during the implementation part. It becomes very challenging to ensure that firms are not participating in collusive behavior in the product market while entering the research joint venture (RJV).
    Type of market structure also plays an important part in deciding the extent to which firms will go for collusion. In a monopolistic competitive market, firms will have less incentive to go for collusion since they need to differentiate themselves in terms of price and quality while in a oligopoly market, firms will prefer collusion since consumers will have less choices available eg: OPEL. This should be kept in mind while encouraging cooperation in R and D among firms.
    Also, there should be a separate body to monitor the extent of collusion in product market and the decision to extend the support to RJV should be based on that. Monetary or other type of punishment will help in deterring firms to get into collusion.
    To conclude, as long as benefits of cooperation in R&D exceed the damages caused by collusion, the support should continue since the overall surplus is greater.

  22. Keuller Dorian 18 November 2014 at 23:03 #

    As told in the preview post, cooperation in R&D between enterprises in the same market could be theoretically very favorable for both because it allows a diminution of duplications efforts and also a growth of innovation . I mean that they will raise the capital in R&D and will share their informations between them. That will thus lead to a fast growth of innovation. The problem linked to this policy is the risk of collusion. Indeed, theoretically a cooperation in R&D is benefit for markets and consumers because the concurrence will still be present , as the price wars. But, there is a risk that this agreement hide a collusion. In this case, the total social welfare of consumers will decrease and prices could raise. Actually, cooperations in R&D are allowed by the European Commission (2010) only if the sum of their market shares are lower than 25%. I totally agree with this policy because that allows smaller companies to be able to follow leaders in terms of investments in R&D. And, moreover, maybe make them able to get more market shares by finding new innovations. They will not specially get an advantage in a collusion.

    About the expansion of this rules, i don’t really have an opinion.

    In one hand, if the rules is applied in Europe, that will for me allowed big companies to create “cartel”which are almost invisible for the regulation institutions. The consumer’s surplus will significantly decrease due to the indirect diminution of the competitivity. Moreover, a company in a cooperation can steal informations, copy some strategy and see the SWOT of others on it. Once again that could decrease the total surplus. Another negative aspect of this extension is the risk of a slow of innovation. Indeed, competition, despite the wastage of money, motivate companies to try to differentiate themselves, and so on to innovate. By the regrouping of knowledges, all resources are allocated only for a purpose, others are not considered.

    For me, the perfect solution could be to increase the scale of this expansion only in some sectors. Indeed, regulation institutions should expand this rules only for slow research sectors (see above for examples). The control will be easier because it will be only for one sector. Moreover, a written contract should be conclude between regulators and companies which contains all details about conditions and limits. And we could imagine a system where companies have to make early reports of the cooperation results.

  23. Platiau Sylvain 18 November 2014 at 22:56 #

    I think that extended the scope R&D legal cooperation is a good thing for firms and for society in general. R&D costs are sunk costs so we have to allow firms to avoid it to increase their surplus and so the social surplus.
    But, on an other hand, we can argue that cooperation between firms to develop a product can lead to a loss of consumer surplus. Even more, if this cooperation is vertical, the two firms can behave like a monopole and so decrease consumer surplus even more! Some can say that such behavior is good for society if it maximize the social surplus but I don’t agree: I think that the fact that capital is not uniformly distributed (and so redistribution of firms surplus) is an important think and so we have to pay more attention to the consumers surplus than the producers surplus. So in this point of view we can say it is not a good thing to extend the scope of cooperation.
    But I think that in most industries there exists a range of concurrents with substitutes even if there is development. And since there exists strict rules to avoid collusion, etc. there is no need to avoid firms to reduce costs and so possibly reduce prizes. In industries where there is not strong competition, this is more delicate and in this case European Commission ha to pay special attention in R&D cooperation.

  24. Ritej Bachhawat 18 November 2014 at 22:42 #

    The revised EU R&D policy on block exemptions in 2010 has been liberal in encouraging RJVs (research joint ventures) but that is not just motivated by the urge to get over the economic crisis and promote investment (or reduce waste investment) but also because it allows your investments to generate high returns with minimum risk.

    Now to understand where does this policy impact the product, we understand the 4 stages of the product development process:- 1) R&D investment/ technology up-gradation 2) prototype (or molecule) development, 3) testing and 4) final product roll-out in market. The RJV policies allow collaboration in the 1st stage directly but its impact culminates in the 2nd stage invariably. Now the JV parties understand the final product is going to be similar and results in a greater temptation to reduce competition and strategically maximize profits simultaneously by cooperating. This leads to collusion in 4th stage by either demarking territories/ target customers or by maintaining a higher than expected threshold price. This is a practice most common in petroleum and gas industry where parties enter into JVs by sharing the cost of discovery and this ultimately leads to profit sharing or price collusion ultimately.

    One way of making sure the venture doesn’t violate any competition laws is by applying it to industries where the end-product type is almost always similar (homogenous) and the major differentiator for companies would be their way of positioning and selling/ making available their products. Also, another important criteria in filtering the applicable industries should be that the product’s proposed invention shouldn’t be with the capitalist mind-set alone, where the intent is to fulfil the ever-increasing luxury desires of the rich (eg:- a car that could fly, drones for home delivery), but rather a one generated through the necessities especially for the masses (eg:- cure for ebola or Hepatitis C virus, cheaper alternatives to fuel etc.).

    As suggested by Sovinsky and Helland (2012), collusion has been a major attraction for firms collaborating in RJVs. With stricter regulations, collaborations have significantly decreased now in certain industries. Considering this observation (which most likely applies to other industries too) and clubbing it up with certain specially designed rules per industry (as per the views laid in the preceding paragraph), policymakers should focus on creating a more controlled RJV environment. The effect of this promises to continue remaining fruitful in capital-intensive industries where the initial discovery costs are high and hasten essential discoveries.

  25. Thomas Boreux 18 November 2014 at 21:48 #

    In my opinion, the border between cooperation and collusion is really thin, and that’s why this subject is so interesting. But to which extent could we consider a cooperation as a collusion, or a sharing act as a cheating act? I think we have to think as a consumer. Wee can see two different impacts of this practice on consumer’s welfare.

    On the one hand, consumers benefit from cooperation in the sense that the R&D researches are more efficient. Also, cooperation doesn’t mean absence of competition. For example, according to D’Aspremont C. and Jacquemin A., cooperation can take place at the « pre-competitive advantage ». Companies share the basis of their researches and their findings. They work together on the R&D stage but remain rivals on the market stage. What could we expect form this type of cooperation? Firstly, an reduction in R&D costs for firms due to the economies of scale and the avoidance of investments waste. Secondly, an increase in consumers’ welfare due to the rivalry on the market stage. Indeed, competition between firms spurs innovation, and there is thus a positive impact on consumers.

    On the other hand, collusion harms consumers in the sense that fixing a higher price for example decreases consumers’ welfare and increase firms’ one. This practice is of course illegal.

    The question now is to know from what point cooperation becomes collusion and from what point welfare’s decrease outweigh welfare’s increase. In my opinion, in the case of a too high risk of collusion, there are two solution. The most radical is removing all kind of law about cooperation in R&D to avoid collusion, which is in my opinion an extreme measure, that would be a brake on innovation. The second one is enhancing control on collusion and introduce more serious punition for firms doing this illegal practice.

  26. Simon Verhaeghe 18 November 2014 at 21:42 #

    In my opinion R&D cooperation has to know some incentives form European Commission, but those incentives and their impacts must be controlled. However, to avoid the negative externalities of these cooperation, the EU has to achieve to right position among promote, supervise them and reprehend them.

    Moreover, this shared purpose could lead to collusion. We have to take care of that collusions occur. Most of them induce many troubles in the market. There are different ways to prevent these collusions and protect the market against. Antitrust law, leniency policy… are present in the world in different forms but we will focus on EU policy.

    Through this new policy the competitors receive an incentives to cooperate away from their own market. This could minimize the incentives to create a cartel. Despite of this new legislation, the collusion’s sustainability is less affected.

    I think that the best way to achieve a growth of innovation while the risk of collusion decreases, we should focus on the main purpose of R&D cooperation which is a maximization of total welfare. Respectively build an environment friendly for innovations and bad to sustain collusion.

    To conclude, I think that the EU policy is good but not enough. To achieve the objective of European commission a trade-off is needed between antitrust and R&D agreement policy.

  27. Charlotte Moreau 18 November 2014 at 20:56 #

    Cooperation has many advantages like sharing costs, pooling risks or gathering competencies’ skills and this process avoids wasting time twice on a specific innovation. But sometimes competition could be better because it drives people to find new processes or innovations. By every firm working on its side, it may create a race climate but it is good to have different points of view, there is more creativity out of it.

    I think Europe was right to allow these R&D agreements because on several levels namely financial, cooperating is beneficial for both parts. It is a great asset for small firms that don’t have many financial resources but may have the right knowledge in their team. With a R&D agreement, they would then beneficiate from their structure and resources. And the big firm would also win by externalize the R&D.

    Nevertheless, it was maybe giving too much freedom to extend this agreement because companies have now more incentives to make collusion, knowing that it is difficult to highlight this kind of cooperation. That is a risk for Europe, especially because these illegal agreements are not profitable for consumers.

    Finally, firms don’t have to go towards the same point. Even with opposite incentives, firms could create a R&D joint venture to achieve technological progress. Also the size of the companies don’t matter spin-offs and big companies could really find a win-win situation. The authorities have to find a trade-off between the technological progress and the protection of consumers.

  28. Ricardo Carvalho 18 November 2014 at 19:16 #

    Intellectual property is always a controversial subject. It’s mere existence is often debated. However, in my opinion, modern intellectual property is essential and must always strive to be a fine tuned tool that allows for the innovation to thrive, much more than let any non competitive behavior to happen.
    While it may seem like a game of cat and mouse at times, it is important to try to “patch” these loopholes that arise. This way, it is a good idea to try to see the good points about research joint ventures.
    In my opinion, the perfect use for research joint ventures would be for companies that either have a hard time investing, or would have a hard time recovering their investment if they pursued it by themselves (either because there is high volatility and they are not sure if they will come up with a relevant invention, or because of the sheer difficulty of running R&D efforts), but have as a main goal to bring new innovation to the market. This is the key difference, since we want companies that are looking to push products out without the risk of R&D losses, instead of uniting big entities to collude after the invention is made. Hence, one of the ways to strike a balance, in my opinion, is to reward the right use of this structure (RJV), and punish its bad uses. So, for example, in addition to lowering the time validity of patents arising from these joint ventures, another way to stimulate fair competition is to force these patents to be licensed, with a value being decided by a regulatory entity, but based primarily on the investment costs. This way, we make sure that any invention that is profitable will still yield a good return on investment to the companies that are a part of these joint ventures, while ensuring that intellectual property as a collaboration isn’t turned into an anti competition tool, that ends up leaving the consumers and overall market worse off
    Therefore, I believe that we shouldn’t give up on the idea of collaborative R&D. I just believe there is a certain execution that will lead to better results than certain inevitable anti trust and collusion lawsuits.

  29. Copay 18 November 2014 at 18:43 #

    These results shows that once firms know they cannot trust each other anymore in the case they collude, they are less likely to enter in a RJV. This shows that it might be the case that previously, a number of firms were entering RJV in the aim of colluding. The leniency program makes it more difficult to collude. It is more difficult to trust the partner. The members of a cartel have now a big incentive to go to the court report the cartel. As that as it is more difficult to collude, collusion doesn’t represent an incentive for firm to create a RJV. Therefore, fewer firms create a RJV.

    In our European case, these results would suggest that coordination in R&D among firms would probably increase collusion in the market among firms. Therefore, the R&D block exemption is likely to create more collusion among firms in the product market. This could lead to under-provision or to an increase in price that would harm the consumer. This is probably true.

    However, this doesn’t mean that extend the scope of the R&D block exemption in the EU is a bad idea. Indeed there are currently lots of information problems that create inefficiencies in the R&D. The R&D block exemption reduce these, inefficiency by reducing asymmetry of information, duplication of effort, …

    Knowledge is characterized by a strong tacit content: dedicated interactions among agents are necessary to make the transformation of new scientific knowledge into technological knowledge possible. The quality of communication channels and the context in which user-producer interactions take place plays a key role. The levels of transaction and communication costs that add on to knowledge absorption costs vary among the institutional context in which knowledge interactions take place. The lower are these costs the bigger the economic progress (through the positive effect on TFP of technological innovations) will be.

    The BERD exemption allow to attain compatibility between the levels of appropriation and incentives with the levels of accessibility of existing knowledge.
    Therefore I think it was a good idea to extend these block exemption.

    Alternatives, are the academic system, the geographical concentration of firms specializing in different layers of the same value chain, large corporations able to rely upon internal financial markets and hierarchical interactions in the generation of new technological knowledge Antonelli, 2006).

    Antonelli, Cristiano, 2006. “The Economics of University: a Knowledge Governance Approach,” Department of Economics and Statistics Cognetti de Martiis LEI & BRICK – Laboratory of Economics of Innovation “Franco Momigliano”, Bureau of Research in Innovation, Complexity and Knowledge, Collegio 200602, University of Turin.

  30. Sebastian Singer 18 November 2014 at 18:11 #

    R&D co-operation also known as horizontal agreements is defined as “R&D activities which are jointly conducted with other firms or research institutions”. They occur in many facets and can be distinguished in the degree of co-operation and the manner of co-operation e.g. pooling of research forces, research funding etc…In the following comment I would like to discuss the pros and cons of R&D cooperation underlying the maximization approach of gross welfare at the example of the revised competition rules on horizontal agreement by the European Commission in December 2010.

    Firstly, on the one hand one can presume the existence of illegal agreements on the product market when authorities, who are in charge, loose the borders of R&D cooperation laws or allow it in the first place at all. As we can see from Warwick and Helland there might be evidence by raising this these.
    On the other hand when we focus on the EU’s legislation in 2010 concerning this topic, which is mentioned before, and the statistics of antitrust investigation, there is a negative correlation between the number of investigations (started by national authority or the commission in suspected cases) and time since 2010. In other words, after the revise of the assessment of R&D co-operation agreement between competitors in 2010, which mainly extended the scope of regulation in this particular field, one can perceive a decrease of antitrust investigation over time. Numerical, from the year 2011 to 2012 the figures of antitrust cases within the EU diminished about 31,29 %.
    Hereby, it has to be mentioned that this could only be a first brief look on the topic and cannot replace a well-defined multivariate analysis to determine the factors of influences on the statistic.

    Nevertheless, one cannot deny that there are a lot of positive (side) effects of R&D co-operation between competitors. We know that “[…] IP generating activities suffer from three sources of market failures: externalities, indivisibilities and uncertainty.” When it comes to R&D ventures the free-riding effect gets alleviated by working together to create IP, instead of performing inaction while participating on spillover effects of knowledge.
    Furthermore R&D co-operation leads to risk pooling because the uncertain project don’t have to be borne by a single firm any more. Therefore this practice also reduces uncertainty for the actors.
    On top, by sharing costs and preventing firms to perform “the-winner-takes-all” races with same R&D projects, involving unneeded expenditures, reduces “problems stemming from indivisibilities”. As a short conclusion at this point, through R&D ventures there can be a small or bigger shift from market failure to efficiency.

    To put it in a nutshell there is much to be said for extending the scope of R&D co-operation between competitors. To ensure a social preferable degree of ventures and deter firms to extend their co-operation on the product market as well, including price fixing or limiting production, there has to be a clear-drawn border between legal and illegal agreements and in addition penalties which reflect at least, in case of infringement, the consumer welfare loss. That rules has to be monitored by an instance with enough capacity to underline the given antitrust laws in a credible way.
    Moreover with the restriction that the co-operating firms are only allowed to exhibit a maximal collected market share of 25%, the European Commission ensure a proper and reasonable balance between market power and efficiency (e.g. without deterring firms to create Marshallian districts with the positive side effects on the society as a whole).

    sources:

    http://ec.europa.eu/competition/ecn/statistics.html#1
    ftp://ftp.zew.de/pub/zew-docs/dp/dp06059.pdf

    http://www.epo.org/about-us/annual-reports-statistics/annual-report/2013.html

    http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2013/twerp_1030_sovinsky.pdf

    Industrial Organization Market and Strategies, Paul Belleflamme and Martin Peitz, 2010, Cambridge University Press

  31. Aymeric de Pret 18 November 2014 at 17:36 #

    Because research joint ventures (RJV) can really help some companies to develop themselves and is a good incentive to innovate, the commission was right to revised its rules. But as it is said in the text, in some cases there is a clear correlation between research cooperation and collusion. This comportement of the firms is quite understandable because if they’re developing something together they won’t be willing to compete on it. Even if the costs of R&D are shared, it’s not really attractive to have less profit afterwards because of competition than if they had done it alone. There is so a significant incentive to cooperate and collude for those companies. That’s why the rules don’t want businesses to cooperate if their additional market share is higher than 25%.

    The authorities were right to do so. It would be much more attractive to develop a joint venture in a market with lots of concurrents if you’re not planning to collude. Indeed, if the R&D is successful and there is a profitable innovation at the key, the two companies would have an advantage compared to the other firms they compete with. In accordance to me, a form of tacit collusion would then appear between the two innovative firms because it’s more efficient to compete together against all the other competitors than to operate separately. 

    An other way of avoiding collusion while encouraging cooperation would be to allow the companies to set up, in agreement with the authorities, a kind of collusion which would be in between real collusion and hard competition.  This measure could be temporary and the society would not loose as much as if there were collusion. Moreover, it’s a legal incentive for cooperation and thus innovation.

  32. João Costa 18 November 2014 at 09:59 #

    R&D is naturally an expensive and risky investment. And after this, there are also appropriability issues of this new knowledge. Their final results, and technological progress, are essential not only in the company point of view (for example, aiming differentiation) but also for the economical growth, as demonstrated by the Sollow-Swan model. To increase the weigh in the “pro’s” side of the balance, and mitigate the “con’s”, or in other words to induce R&D investments, the governmental institutions make of use a variety of tool at their disposal. Either by increasing the returns (through IP rights) or decreasing the costs (through subsidizing) the governments have been a traditionally having a important role in managing the degree of market’s innovation. One other tool that is often considered is the allowance of R&D cooperation between companies.
    The theoretical basis supporting allowing companies to cooperate in R&D is strong. By sharing the risks and enabling a better allocation of resources between companies, the cooperative investment in R&D can bring better final results than its competitive solution. Although, the success of this type of measures can be very circumstantial.
    The proximity required for R&D cooperation an the strategy alignment for R&D investments that emerge out of it will naturally be heavy inductor to other types of coordination. Personally, I see this collusive market behaviors directly as an expected consequence of this policies and, for that reason, a bigger attention by regulators must be taken and safeguards (like the 25% combined market share limit) must be included. I believe (and EU also by supporting this policies) that the benefits exceed the “competition decrease costs”, specially when applied to smaller companies in bigger markets, where located collusion effects won’t be so large and R&D coordination can allow a more focused investment efforts by these companies weaker (in capital perspective).

  33. Kasper Vagle 17 November 2014 at 20:16 #

    The subject is really interesting, and it has a huge impact on all of us as consumers. Collusion between firms harms the market and then eventually impacts the quality of the product sold or the price we as consumers have to pay. So clearly it should be avoided, but when firms collude or not is not always easy to determine.

    As the article highlights there are great benefits of firms cooperating and working together on their efforts in R&D. But there are two aspects that can harm competition and create collusive market structures even whiteout the firms “officially” colluding (like the OPEC). When firms cooperate on the R&D of new products, both firms will eventually have a good picture of the costs of production of the product. When both firms know this, and they know that their cooperating partner know, they can use this as information not to undercut each others prices.

    Further on close cooperation can give your counterpart vital information on how flexible your company are. If they know that you have bigger margins then them, or that your company is more adaptable to new competition they will not enter into a competition on price, and thus the price might be set higher then if there were no cooperation between the firms. Of course this only applies if the size of the market share sums up to a certain level.

    What I would like to propose is a solution where the focus is on the prosperity of the cooperation. This would open for cooperation between big actors in the market that would not be possible today because of the regulations. The only requirement is that the more you have the possibility to influence the market, the more you have to open up and share. This would then be the trade-off, more cooperation is allowed if you share more information about for example prizing.

    By doing this you can allow bigger firms to cooperate and still hedge society against market failures created by collusion.

  34. Raidron Charles 17 November 2014 at 17:52 #

    After reading this article, my opinion that this policy was « the perfect » solution, has slightly changed, but I am still in favor of it.

    First of all, it has not been made by complete ignorant, but by economists, who have each one a different vision and way of thinking. So if the majority of them agreed on the fact that this solution could work, I think I can trust them. But this is a completely personal way of thinking, and by using more economical arguments, I fear that some problems could occurs.
    The fact that it will lessen or even eliminate the duplication of effort in R&D is quite a positive thing, as it was a deadweight loss. It will be a powerful incentive to innovate, which will lead to more competition, which is the goal at which this policy is aiming, but only if it doesn’t incent firms to collude! It seems paradoxal but it is, for my point of view, what is the most likely to happen.

    Sovinsky and Helland have already proved it, by showing that when a new antitrust policy is implemented, in order to reduce collusion, a lot of firms didn’t found attractive anymore to be part of a Research Joint Venture. They seemed more interested by reducing competition than reducing their costs and increase innovation, so we can ask ourselves if it was really a good idea to extend the scope of the R&D block exemption….

    I don’t know if this is realistic in term of time and charge of work, but a way to reduce the negative externalities ( incentive to reduce competition) could be some controls before and after the beginning of the cooperation, to check if some majors changes have occurred in pricing, entry deterrents for other firms,…. And make it clear for firms that huge fines will be charged to those who show signs of abuse.

    However, as I said earlier, I’m still in favor of this policy, because of all antitrust measures that are already in place, it will be very difficult for firms to find a way of colluding that will be sufficiently profitable for them and also sufficiently hided in order to not be discovered or to be sufficiently profitable for everyone in order to not make any part of the colluding wanting to denounce.

  35. Peeters Pierre-Yves 16 November 2014 at 14:45 #

    R&D cooperation is clearly benefic for the society in a competition context, the commission understood it very well. However the competition context must not be narrow. Indeed in a duopolist market R&D cooperation would lead to reduce to welfare of the consumers. That is why the commission put some limit for for firms having a large part of this market.

    More than that, this kind of cooperation must not lead to other horizontal agreements which will harm the consumers like price fixing, production cost sharing…

    The R&D Block Exemption Regulation is thus normaly well thought to allow cooperation and to avoid stronger cooperation like cartels. But is this true ?

    The empirical analysis of Sovinsky and Helland showed that if a change in policies affecting horizontal agreement like price fixing had influence on possible R&D cooperation.

    I personnaly think that it is hard to avoid any kind of other agreements when two firms have a common research departement. This is why change in agreements policies has a clear impact on the cooperation.

    Withal all the actors need cooperation. The policy of the Commission is good but risky. The best way to deal with that problem is to control those cooperation more often. Even if it is clear that knowing that they will be watched by authorities will dimunish they incentive to cooperate this is the easiest way to avoid other kind of cooperation.

  36. Adwate Kumar 16 November 2014 at 09:24 #

    I agree with commission’s decision to extend the scope of the regulation to allow cooperation in R&D. Competitive R&D does not maximize social welfare, as resources are wasted on doing the same research as the competitors. This is especially true if the initial costs of R&D, like setting up a lab, are very large.

    The Sovinsky and Helland study represents a very unique case. The sectors chosen by the study all have very high entry barriers, hence have limited competition. In such an environment, it becomes easier and more profitable to collude in the product market. I think that the presence of RJVs is not the main cause for collusion.

    However, I agree with the authors that collusion on product market reduces social welfare and should be prevented. This could be done with stricter monitoring by competition agencies of EU rather than by preventing collaborative R&D ventures

  37. Sailesh Ganesh 13 November 2013 at 21:28 #

    I agree with the extension. It is considered perfectly acceptable for a firm to engage in research, and later, license out any patents arising from this activity to other firms as a way of recovering the costs. Certainly, this type of activity benefits both the firm and the consumer.

    The extension of block exemption to paid-for-research is somewhat similar to the above scenario, with the only difference being that the second firm pays up-front for the research. The co-operative nature of R&D in this second scenario (which is not allowed) could very well make it easier – compared to the licensing scenario – for the firms involved to engage in cooperative activities. But the same is possible when the firms are otherwise co-operating in a research activity.

    For any opposition to the extension to be valid, it must be shown that it will increase the chances of collusion between the firms. The results from Sovinsky and Helland (2012) relate to RJVs in general, and do not specifically address whether the extension itself is a bad thing, given what we already have. If we do accept the premise that RJVs increase the propsensity of collusion, the logical response should be to disallow all forms of RJVs, not just ones where one party pays for research conducted by another. Since we can assume that the inital premise of allowing RJVs is justified, there is no reason to not extend it to paid-for-research activities.

    Absent government regulation, firms will certainly gravitate towards collusion in the product market. Despite mainstream economics treating that as a bad thing to be curtailed, it is debateable whether such behaviour is truly harmful (see Hayek (1948) and Boudreaux for a discussion on this). If we, therefore, reject the premise that collusion is necessarily a bad thing, the main objection to RJVs is no longer valid. And even if we do not, based on the discussion provided above, given that RJVs are already allowed, the extension only makes logical sense.

  38. Delinte Jérémy 13 November 2013 at 15:48 #

    In my opinion, R&D cooperation is a good opportunity to spur innovation. Indeed, some innovations require expensive and risky investments. This block exception can help a company for providing a product more rapidly. It could be benefit for companies present in dynamic markets like IT for example. Indeed, in this kind of markets, a company should be able to provide continuously up-to-date products to be as competitive as possible. Moreover, this block exception also affects positively consumer surplus because market could be more competitive where more product could be launch and more choices are available for consumers.

    Secondly, as mentioned in this article, the bad point of this decision is that it can lead to a cartel. But in my opinion and regarding to the Sovinsky and Helland‘s study, the extension of the scope of the R&D block exemption in the EU allows competition policy to have a stronger control on companies that want to join a RJV. In the Sovinsky and Helland’s study, we see that the revised leniency policy decrease the probability for companies to join a RJV in all industry concerned. Thereby, with the block extension, we can assume than companies which want to collude for sharing confidential and anti-competitive information will not use RJV to collude due to a stronger control.

    Finally, in my opinion, the extension of the scope of the R&D block exemption plays 2 roles:
    – Having a better control on companies taht want to collude
    – Promoting innovation

  39. Valerio Serse 12 November 2013 at 22:20 #

    In my opinion, block exemption of R&D agreement, and its successive extension, made by the European Commission is a kind of policy that could enhace innovation and increase social welfare even if it would affect negatively the competition. However, I think an antitrust policy similar to the one made by the US in 1993 could be a good complement of the EU antitrust framework.

    I believe that is important to say that, with respect to the separation between cooperation in R&D and cooperation on product market, R&D cooperation is likely to lead to a price agreement between firms because they have a big incentive in doing so, but obviously this will affect negatively the competition in that market. The incentive to cooperate also in the product market could be seen as a firms’ reaction to the free-riding issues of R&D cooperation. Firms that are cooperating in R&D could set a price just below the monopoly’s one in order to reduce free-riding in choosing the level of effort in the RJV. In other words, they will have more incentive to maximize their efforts in R&D since their future profits are more attractive than the present ones after having fixed a price.

    However, a collusion on the product market couldn’t lead to a loss of social welfare. This is the case when spillovers in R&D are grater than the loss in competition. In fact, reducing the overall costs of R&D and accelerating the production of the innovation, the cooperation in R&D could lead to an increase in social welfare even if eventually the market wouldn’t be competitive anymore. That is why I believe that the decision of EC (block exemption of R&D agreement) is a good policy in a social welfare perspective.

    Anyway, I think that is also important to monitor those companies that are involved is such R&D cooperation. This because allowing two or more firms to share their efforts on R&D could finally become a cooperation for other purposes different than the research. If this happen and it is likely to be the case, antitrust authorities should intervene. For this reason I believe that EC should make a set of rules that contrasts this behavior, encouraging only healthy cooperation in R&D, and I believe that US revision of the ‘leniency policy program’ made in 1993 could be a good starting point.

    http://www.krannert.purdue.edu/faculty/smartin/vita/RDJVTPC.pdf
    http://people.stern.nyu.edu/lcabral/publications/IJIO%202000.pdf
    http://www.newsmercati.com/Nuove_regole_UE_sulla_cooperazione_tra_imprese_concorrenti

  40. Ruben Savelkoul 12 November 2013 at 20:43 #

    I would like to comment on the role of collusion in the decision to invest in R&D with an example. Suppose two firms in the same market can, through R&D coöperation, come up with a new product that is actually a variation of existing technologies. They would not be able to patent this because it is not ‘new’. In this situation it is possible that the firms feel that the only way to gain from innovation, is if they collude afterwards and recoup their cost by higher markups in the short term because they might expect to be copied by other firms soon. This would be a very similar situation compared to a patent actually, as they a the short period of collusion as a means to recoup their costs.
    I feel that there are many possible situations where firms are not able to patent their innovations, so collusion is their only chance to recoup the investments. If they think collusion is impossible, they might not even try to innovate. This way, collusion can be good for total welfare in the long run, considering the new product would benefit the consumers.
    This is by no means a plea to allow collusion, because I think that it has negative effects in most situations. I’m just trying to emphasize that for every distinct rule you make, there can be negative effects (in my example it could impede innovation). This implies that judging R&D coöperation and possible collusion on a case by case basis could be better in some markets. For example if in one market innovations are easy to copy and profits would quickly fade, other rules/decisions could have a better effect than in a market where innovations are extremely complicated and hard to copy such that an innovation will provide enough profits to recoup investments, even without collusion.

  41. Sarah Lorant Dourte 12 November 2013 at 14:07 #

    Do we have to encourage R&D cooperation and at which level?

    As said in this post, R&D cooperation provides incentives for innovation by allowing firms to avoid double efforts, to enjoy economies of scales and to share ideas and technologies. We have to distinguish two stages in the cooperation process. The first one is cooperation for innovation and the second one is cooperation for the commercialization stage. If the spillover are sufficient enough (sort of externality among firms), cooperation in the first step induce an increase in the R&D investment and an increase in the output level. For cooperation in both levels, the level of output could be lower than the non-cooperative situation if the spillovers aren’t high enough. What does it mean in term of Welfare? Increase in the R&D and the output levels increase welfare but the cooperation could be seen as a kind of collusion that would decrease Welfare by increasing the price over the marginal cost.

    One other argument developped by S. Martin is that the problem isn’t that cooperation is a form of collusion but that cooperation makes collusion more sustainable. They are able to share the use of the patent/technology that they both contributed to discover. The joint venture at the R&D stage induces that to behave independently on the commercialization stage would be less profitable. Then there is an incentive for collusion.
    One solution is to change the regulation for collusion in order to dissuade cooperation for which the main objective is collusion in the second stage (commercialization). But as cooperation induces herself an incentive for collusion this isn’t enough. The social profitability of cooperation in R&D can be computed only case by case in function of the spillovers, the scales economies, etc. balanced with the incentive for collusion. I think that cooperation should be allowed or not by Antitrust Agencies such as mergers are because of the risk of collusion.

    MARTIN, S., (1995), “R&D joint ventures and tacit product market collusion”, in European Journal of Political Economics, vol.11, pp.733-741.
    D’ASPREMONT, C., JACQUEMIN, A., (2001), “Cooperative and noncooperative R&D in duopoly with spillovers”, in The American Economic Review, pp.1133-1137.

  42. Willems Margaux 12 November 2013 at 13:32 #

    As my colleagues, I find the extension of the Block Exemption Regulations a good point. If I understand well, the aim is to help companies to work together in terms of R&D and to limit the agreements harmful for us, consumers. In fact, increase the social welfare.
    If companies search to find a new product, maybe they have not the same final goal. The risk is that they make agreement like collusion but hidden by the R&D research. The commission wants to control the exchange of information.
    As we know, R&D can cost a lot of money and then cooperation allow to companies a sharing of this cost and most important, a sharing of technologies. A good idea is not sufficient to be an innovation, most of the time resources are needed. I think that it is motivating to companies to know that commission help the cooperation.
    To conclude, I’m not sure if the regulation is reliable to avoid the collusion and the decrease of social welfare, of course some companies always try to cheat and skirt the system. But I’m totally for this kind of cooperation to bring motivation to firm and why not more employment in the future?

  43. Sylvain Choquet 12 November 2013 at 12:28 #

    I think that the decision from the EU commission to extend the scope of the R&D Block Exemption Regulation is a good idea, because it could increase R&D spendings. This could be particularly useful in fields where research are particularly long (I think, for instance, in chemistry, pharmaceuticals and so). In these fields developing new molecules and testing them is a really long process (It can last 10 years) and the molecules could not prove useful, if firms can cooperate to research and develop new molecules the process will not be faster but at least costs are shared. Especially in the pharmaceutical field where “low-cost” drugs (i.e. the so-called “genereticals” drugs) start to rise and lower the benefits for big pharmaceutical groups (they use this argument to dissuade public policy towards more “low-cost” drugs, by saying it harms their benefits and thus R&D).

    Moreover R&D do not lead to direct product, and firms could still compete by differentiating their products either in performance, either in the segment (premium or more generic). I personally believe that R&D cooperation can be used “for the sake of a greater good”, think for instance of electric cars. Major european car companies have developed their own electric cars, thus spending a lot of money and time to achieve the same results. If they cooperate they could develop totally new batteries (the heart of the problem for electric cars) and save R&D costs. After that the business model is different between firms, and therein lies the competition.
    Another way to increase R&D cooperation can be through joint-venture and start-up, major players on the market could invest together in start-ups and help them (with their installation for instance).

    However in order to prevent the collusion I think that the EU commission should seek to extend Antitrust laws. The ‘leniency policy program’ in the united states seemed to be efficient to prevent cartel formation and such programs could be adopted in the EU with some modifications, of course. By preventing cartel formation or at least punishing firms heavily, collusion could be reduced while R&D cooperation increases.

  44. Diogo Machado 12 November 2013 at 01:08 #

    In line with most of the previous posts, I am also in favour of allowing firm to cooperate on RJV’s activities and with extending its scope. However, I would like to contribute with 2 main ideas.

    Firstly, I disagree with the idea that the main finding in Sovinsky and Helland (2012) is that RJV’s activities are leading firms to collude. Indeed, they show that some firms were colluding, as Adam Smith warned “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”. But if this collusion was not through RJV, it would be through CSR activities, charity support activities, ALUMNI associations, private clubs, etc… So, what I believe to be the important result from their study is that leniency programs work! That is actually in support of RJV’s activities, as with leniency programs just the firms that are really interested in this activity and on its possible outcomes will commit to it. Regarding the ones that were just interested in RJV to collude, the authors’ research has shown that leniency clears them out! Thus, as we also have harsh leniency programs in the EU, then it is perfectly reasonable to maintain or even to extend the scope of RJV’s activities.

    Secondly, we must keep in mind that, as N. Kroes stated, “Free competition is not an end in itself – it is a means to an end”. The end is of course increase social wellbeing. Therefore, obviously that the elimination of R&D’s duplication costs increases welfare, as well as the creation of the innovation, as it becomes more attractive under cooperative R&D. But what I wanted to add is that collusion, even in the product market, does not necessarily lead to a decrease on welfare. We already had situations in the EU where the authorities allowed firms to collude in order to avoid letting the entire industry going out of market, due to a temporarily unexpected shock. Similarly, imagine that firms are launching a new product in the market, derived from a RJV. It may be the case that without cooperation firms may end up cannibalizing their innovation. That is, without taking advantage of the learning by doing benefits that are just achieved with time (the learning curve), and due to uncertainty regarding preferences for a new product, it may not be in their interest to take the risk. As a result it might be that an initial collusion in the product market favours the creation of the innovation that would not otherwise get to market, which is a lost opportunity of increasing welfare. I am obviously not saying that collusion is always good, I am just stressing that it is not always necessarily bad. The EC has enough discretionary power to decide what kind of collusion I acceptable or not, so it must always be taken in a case by case basis.

  45. Duvivier Julien 11 November 2013 at 12:22 #

    R&D cooperation, as a company, might be an efficient solution as it allows sharing costs and avoid for both companies to do the same things. But this definition of the R&D cooperation is very similar to the collusion definition.
    Collusions are oligopolies where the sellers work together to share costs, capabilities and so optimize their profits. Collusions are harmful for the customers as they can’t take advantage of the competition.

    The article underlines the importance of the policy and the government’s strong power. Governments have to protect people and so be sure that the market is as fair as possible, and the fairest (in term of surplus) market is the perfect competition.
    Furthermore R&D cooperation is only more efficient for the companies, government have to take into account all stakeholders, all the market and not only one side of the equation. Collusions are inefficient as they produce a higher price and so a deadweight loss.

    What’s more R&D cooperation is against our capitalist system where it’s the plurality of the researches and the competition which lead to innovations. With R&D cooperation we are more in a communist view with one idea which use all the resources. So that cooperation might even become a barrier to innovation.

  46. Anissa Belkhazri 9 November 2013 at 07:56 #

    In my opinion, horizontal cooperation agreements can lead to economic benefits. They allow participating firms to avoid the duplication of budgets, to combine complementary resources and to internalize knowledge spillovers. These agreements would lead to innovative goods and lower production costs. The objective of firms entering in cooperation for a new product is to accelerate the entry of the product in the market. In addition, these firms intend to reduce costs by pooling the R&D results of the partner and therefore generate synergies. However, when firms enter in such a cooperation, they must bear the risk that the partner will be able to introduce the new product at the same time, thereby intensifying market competition. R&D cooperation depends on the market structure and on the degree of the product differentiation. Moreover, the degree of cooperation depends on several parameters namely spillovers and the number of firms in the market.

    Firms take their decisions in a two-stage model. At the first stage, firms set cooperatively or non-cooperatively R&D and in the second stage, firms decide cooperatively or non-cooperatively in the product market. At the second stage, firms must find the optimal degree of cooperation. In fact, there is a link between the degree of cooperation and the degree of collusion especially in the case of multimarket contact. Usually, firms find easily a way to make an imperfect collusion that is between zero collusion and total collusion than a complete one to make it sustainable. This collusion can be explicit or even tacit.

    The authority of competition must define the objective that should be achieved and on this bases must find the most appropriate legal instrument. Actually, there are two objectives in the balance, on the one hand, maximizing total surplus and on the other hand, maximizing consumer surplus. Since the standard in antitrust is consumer surplus, then this kind of cooperation may be harmful but pure R&D agreement are positively considered by the EU competition policy but difficult in practice to implement.

    From my point of view, the R&D cooperation agreements can help SMEs that have an incentive to innovate and tend to have an high R&D productivity compared to larger firms. This leads to look beyond their «walls» and find partners to complement their internal R&D efforts. This way will allows SMEs committing in cooperation for many reasons, namely acquiring missing knowledge, complementary resources and reducing costs.

    Unfortunately, there is no perfect policy. In my opinion, competition authorities must find a compromise between efficiency and market power. A particularly tricky task for the competition authorities is to find the optimal degree of cooperation to avoid firms to find their optimal degree of collusion. The competition authorities has to be aware of the possibility that firms collude where they are direct competitors, they are more suspect than non-competitors firms. I would like to add that if firms have a strong incentive to collude in the product market, they will do it even if R&D horizontal agreement are not allowed by the EU authorities.

    In the case of an R&D cooperation that leads to collusion, I argue that penalty would be more heavy than in the case of a collusion without R&D horizontal agreement in the scope of the EU block exemption. I suggest that intense inspections should be directed at the firms that have a high risk of collusion when they engage in R&D cooperation must discourage firms to collude. However, it is not easy to find an optimal policy that takes into account all the factors simultaneously.

    In conclusion, in the economics field, we cannot apply a one shot measure to solve a problem but we can implement a step by step regulation.

    References:

    – P. Teirlinck and A. Spithoven, Research collaboration and R&D outsourcing: Different R&D personnel requirements in SMEs, Technovation 33, pp. 142-153.

    – A.L. Lòpez and X. Vives, R&D Cooperation, Spillovers and Antitrust Policy, 2013.

    – R. Ruble and B. Versaevel, Market shares, R&D agreements, and the EU block exemption, International Review of Law and Economics.

    – L.M.B. Cabral, R&D cooperation and product market competition,International Journal of Industrial Organization, 18, 2000, pp.1033–1047.

  47. Suzanne Beguin 8 November 2013 at 23:34 #

    I think that the European Commission decision to revise the set of rules about agreements and competition is a good way to foster R&D and innovation.

    In a way, we can make a parallel with that policy to authorize cooperation in R&D and the Schumpeter’s view about innovation. In fact, authorized cooperation that can be expressed as “agreements”, cartels, mergers, … with the condition that it “help to promote the exchange of know-how and technologies, to facilitate technical and economic progress, and to rationalize the manufacture and use of products that benefit consumers among others” can also be seen as an authorized monopoly (with agreements, cartels or merger, several firms can be considered to be single entity). First, the effect on the market of cooperation is similar with the one of monopoly (price increases, concentration, barriers to entry… ), but combined with Schumpeter’s point, tolerating monopolies and agreements are a way to encourage the innovation. According to him, R&D efforts are more likely to be undertaken by large firms than by small ones. That last argument support the point that the block exemption for R&D agreements can be useful to foster innovation if advantages of the “new created monopoly” are well used.

    We can recall the debate of which market structure is the most conductive to R&D, but we can see it leads to the same trade-off: should we give the monopoly incentive to invest in innovation and R&D to the detriment of competition, or should we let firms fight competitively by investing in R&D? As always, the results are ambiguous, and the Commission will have to examine each case apart. I personally think the Commission must guarantee the remaining of a certain fringe of competition and a turnover of firms in the industry. A unique firm on the market can become too dangerous and too lazy to innovate by itself.
    For the effect of the leniency programs on the number of RJV, I think we must consider that the choice of the European Commission of protecting the competition within the single market by prohibiting anticompetitive agreements and concerted practices is more important now than encourage firms to innovation. I think that the view of the European construction is still more focus on the realization of the common market than on the improvement of the European Union by an expense in innovation process. As this trend is existing, tendentious agreements and cooperations will not be well judge in term of innovation and welfare improvement.

  48. Cibuabua Yves 6 November 2013 at 21:45 #

    When we are in a very competitive market, we don’t need to regulate the cooperation between the different firms, due to the fact that there is no risk of collusion. Their market shares are not enough important to impact on pricing or quantities on the market.
    Cooperation between competitors could be a good thing, they don’t duplicate the same costs, which is negative, it’s a kind of brainstorming where different specialists share idea to innovate and find efficient way to produce and distribute their goods. The consumer welfare could also be increased this way.
    The paid for research is not a good extension of the cooperation in my point of view when we deal with big firms which get big market shares because they can agree to find new ways to deter competition to get a less competitive market and charging higher prices.
    The markets are moving constantly, as European firms compete with the rest of the world, they have to be efficient, so the commission made a good decision by implementing the R&D cooperation between firms. And by the same way, it’s a kind of protection of people to get their job, talking about “delocalization”.
    Giving incentives to denounce a collusion, then the firms colluding will have to pay a high fine and the one who help to disintegrate the collusion will be relax or pay a little fine.

  49. Tomè Clarissa 6 November 2013 at 17:00 #

    According to me exempting R&D agreements from rules against horizontal agreements and collusion is a fundamental step in the legislation of EU. I’m in line with the idea behind the legislation that “cooperation on R&D helps to promote the exchange of know-how and technologies” that leads to technical and economic progress. As it is written in the post, R&D agreements allow firms to avoid duplication of effort. This permits to reach an industrial outcome with lower costs, because the costs of R&D can be shared among the firms that participate in the agreement. Reduced costs can lead to reduced prices for consumers therefore I think that a legislation that allows R&D agreements is indispensable because these agreements can be beneficial for the society as a whole and not only for producers. Not allowing the formation of R&D agreements, in my opinion, can lead to the formation of tacit collusion which can have the effect of harming consumers. Firms, in fact, since agreements on R&D are prohibited, can decide to collude in order to get benefits, but this ends up in distorted outcomes for the society. Given the pro-competitive effects and the social benefits that can result from R&D agreements, I argue that a regulation that permits this kind of agreements is necessary for the well-functioning of the economy, but there must be strong supervision in order to avoid that this kind of agreements give rise to anticompetitive behaviours.
    As for the inclusion of “paid-for-research” agreements into the scope of the regulation I think that a deep analysis is needed. “Paid-for-research” agreements con lead to the same benefit for society as the R&D ones, because they can enhance research and competition. Anyway, with “paid-for-research” agreements, one party finances the R&D activities of another party exploiting (jointly) the results. I find this behaviour similar to a partial acquisition of another firm, a sort of minority shareholding, because a firm finances the activity of another firm and it gets some profit from it. Obviously it is not the same thing but I think that “paid-for research” agreements are more than a simple cooperation in R&D. Therefore, I think that they should be allowed by the competition policy regulators but they also should be more strongly regulated and supervised than R&D cooperation because I think that there is a higher risk that they can end up in a situation of collusion.
    In conclusion, if I had to say which policy the competition authority should follow, I would say that the European legislation is a good framework for competition policy in R&D agreements, including also “paid-for-research” agreements, provided that it is accompanied by a strong supervisory mechanism in order to avoid that the beneficial cooperation gives rise to negative outcomes.

  50. Jean-Benoit Valschaerts 6 November 2013 at 16:27 #

    As a response to Lukas Kelling saying it was a good idea to extend the R&D Bloc Exemption to take into account also paid-for research I would say that I agree when looking at it strictly. But I think that the problem lies deeper behind this. As the author of this article writes, R&D cooperation only is good for social welfare if it doesn’t lead to collusion on the market afterwards. Yet it seems through the study of Sovinsky and Helland (2012) that it is not always the case. As a lot of other economic problems, it certainly depends on the industry that is analyzed. But it still shows that a lot of firms are interested in more than just being in a Research Joint Venture.

    I think the European Commission should review its policy and conduct a thorough analysis of how the two forces, the increase in social wellfare due to more efficient R&D spendings vs. the loss of wellfare do to collusion, balance each other. According to me, they should try to measure if the increase of social wellfare is larger than the decrease due to collusive practices. Maybe there are situations where it still is beneficial for society that firms cooperate on R&D and collude on the market. I think the legislation should take that into account too.

    In addition, I think there are other ways to favour R&D cooperation while limiting the temptation to collude. One would be to give attractive legislation (tax cuts, subsidies,…) to RJV’s while in the meantime going on with a hard anti-collusion policy. This would give firms incentive to develop jointly R&D projects while competing on the consumer market.

  51. Lukas Kelling 5 November 2013 at 22:34 #

    In my opinion, it was a good idea for the EU to extend the scope of the Block exemption on R&D agreements in 2010. Before extending the scope of the regulation, „paid-for research“ agreements have been excluded from facilitation and thereby also the additional positive effects on firms’ propensity for R&D they bring about. Thus, in the present situation the level of support for R&D cooperation is maximized and, likewise, all the affiliated risks. For instance, this regulation provides easier conditions to abuse the given framework by means of collusive behaviour in product markets. However, if the commission decided to alter their decision and again implement stricter regulations on R&D cooperation, they would lose the additional quantity of innovation which would act as a multiplier resulting in positive welfare effects which are beneficial for the society.

    As a result, I think the best alternative for the EU is to keep the current policy. Simultaneously, they should enhance their member-states’ national antitrust agencys’ means of controlling the R&D agreements and the overall examination procedure in order to prevent or reduce possibly occuring collusive behaviour in the product markets. As an alternative approach, the EU could also try to create a framework which is similar to the one in the USA after the revision of the „Leniency policy programm“ in 1993, providing cartel members with a kind of incentive to report illegal collusive behaviour in order to decrease the overall amount of occuring collusion in certain industries. This way, collusion could be restrained from within the respective companies instead of just relying on their examination, or even going back to tightening up policy regulations at the expense of overall innovation.

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