Technological Collaboration and Collusion : A Trigger Strategy

The paper analyses the relationship between technological collaboration and collusion. Firms can collude or defect on the output market, but with the novelty that there is a possibility of developing a new technology jointly. The development of the new technology is conditional on prior collusion by firms. The paper derives three main results. First, it is found that technological collaboration facilitates product market collusion, but only in the short-run, by creating an equilibrium where firms collude initially in order to develop the new technology, and then defect afterwards. Nonetheless, there is less defection compared with the standard trigger strategy model. Second, it is shown how the equilibrium depends on the discount factor; in particular, delayed defection is sustained for intermediate ranges of the discount factor. Finally, the comparative statics analysis shows how the equilibrium is affected by changes in the environment. An increase in the scope of the market, an increase in the number of firms, and a lower quality technology all contribute to making collusion more difficult. Whereas permanent collusion is affected only by changes in the number of firms, delayed defection is affected also by the scope of the market and the quality of the new technology. The results are shown to extend to Bertrand competition, although in the latter case there is less delayed defection than under Cournot competition