Conflict and Cooperation on R&d Markets *

We investigate the distribution of profits between a laboratory and two firms on the intermediate market for cost-reducing or/and demand-enhancing technology, and infer implications for the governance of R&D. The laboratory supplies tailor-made multi-dimensional R&D services at some costs, and maximizes its individual profits. Firms are interested in delegating the production of R&D services from a common laboratory, to whom they offer contingent payment offers. On the final market for goods, firms compete in prices or in quantities. We unveil mild sufficient conditions for the (non) appropriation of innovation profits by the laboratory. Anti-complementarities in the dimensions of R&D services imply that the laboratory appropriates some non-zero share of joint profits in all equilibria. In this case, we show that each firm has strategic incentives to shift to a more integrated structure by merging horizontally or by acquiring the laboratory. Complementarities in the development dimensions imply that the laboratory exactly breaks even in all equilibria. In that case, firms have no incentive to shift to a more integrated governance structure. A series of specific algebraic forms, as borrowed from the literature, illustrate the broad applicability of the results, and uncovers common features in seemingly unrelated representations of postinnovation cost and demand conditions. JEL classification: C72; L13; O31.