Quality-improving and cost-reducing strategic alliances

We develop a two-stage Salop-type model to examine quality-improving and process innovation alliances in an oligopolistic context. In the first stage, a network of alliances among firms is assumed while in the second stage firms set prices, product quality and cost-reducing process innovation. We find that quality-improving networks tend to be denser than networks characterized by process innovation sharing, while the quality effort decreases with the number of connections. Furthermore, link formation is welfare improving if both absorptive capacity and quality spillovers are sufficiently small. Although the empirical evidence on cooperation in R&D is fragmentary it nonetheless supports most of the theoretical predictions. We also formulate some variants of the model to assess the robustness of the previous results.