Research joint ventures and the cost paradox

We consider the impact of the cost paradox on the likelihood of cooperative firms to use a cost reducing Research Joint Venture (RJV) to increase research levels when spillovers are large. The cost paradox (CP) occurs whenever industry-wide cost reductions would lead to such intense competition that profits would fall. We give a restriction on cost reducing research which guarantees that an RJV will prefer marginal reductions in research to the noncooperative levels whenever CP would arise and spillovers are less than perfect. In such cases, firms use an RJV to lessen competition rather than to lower costs.