Cooperation spillovers and price competition in experimental markets

Firms often cooperate explicitly through activities such as research joint ventures, while competing in other markets. Cooperation in research and development can allow firms to internalize the external benefits of knowledge creation and increase the returns from research and development (R D) expenditures. Such cooperation may spill over to facilitate collusion in the market, however, potentially lowering welfare and efficiency. This paper uses a laboratory experiment to examine if sellers successfully coordinate to fund a joint research project to reduce their costs, and how this collaboration affects their pricing behavior. The experiment includes control treatments with separate R D cooperation and markets. Our results show that although participants usually cooperate when given an opportunity, cooperation is observed less frequently when they also compete in the market. Communication improves cooperation in all environments, particularly when the market is present. Nevertheless, the data provide no evidence of seller collusion in the market.