Formation and sequencing of vertical research joint ventures

Motivated by the rapid growth in research partnerships and concerned with their sustainability, this dissertation studies the dynamic formation of vertical research joint ventures (RJVs). A vertical RJV is established by an upstream innovator and one or more of downstream firms in a market in order to cooperate in conducting Research and Development (R&D), and commercializing a basic innovation. To shed light on the dynamic formation, the two-period model is introduced.;The first chapter analyzes the relationship between the vertical RJV break-up and its member efforts. Each firm's productivity level, negatively correlated with its effort cost, is private information. Thus, an innovator auctions off an RJV membership, and works with the highest bid firm. After the first RJV failure, an RJV can break up. The break-up structure forces a partner to work harder, but reduces the expected upfront membership fees. This is because the break-up excludes the most efficient firm from the second RJV, and decreases firms' willingness to pay, due to their lost opportunity to work with the second RJV. An innovator's expected revenue is highest, but the expected welfare is lowest, when an RJV continues working with the same firm after failing.;The break-up is chosen if there are a large number of additional benefits to compensate for low expected revenues and enough potential partners to shrink the gap between the best and the next best firm. This break-up also benefits a society when it is implemented. When the effort cost is more expensive, additional benefits and the number of firms requisite to sustain the break-up as an equilibrium decrease. An innovator and a society gain the most under the break-up since it pushes a partner, providing less effort due to its high cost, to work harder than the others do.;In the second chapter, a vertical RJV is formed when a downstream member has bidimensional private values: the development ability, represented by the high (high-type) and low (low-type) probability of success, and the marketability, indicated by the market demand. From a firm partner's viewpoint, only the expected profit, combining both dimensions rather than each of them, is concerned. For an innovator whose goal is to maximize expected revenues paid by her partner, the break-up is also not optimal, since it discourages firms from paying a high price for the first period RJV membership.;Nevertheless, sufficient non-pecuniary benefits such as reputation or academic achievement generated by the project success, which is the technological dimension, cause the break-up. This break-up must also be supported by a high probability of success for the high-type firm simultaneously with a moderate ratio of the low-type to high-type's probability of success. The partial break-up, which prohibits only the first partner with a low bid from joining the second RJV, requires less extreme parameter ranges to be an equilibrium than the break-up does. Intuitively, breaking up partially mitigates the adverse effect of the break-up on an innovator's expected revenue, while still helps an innovator prevent the low-type member in the first period from rejoining an RJV. In addition, an innovator tends not to provide her RJV partner long-term commitment when the market demand is uncertain.;The third chapter studies how an RJV size changes dynamically. Adding one or more members to an RJV raises the final product market competition in exchange with the higher opportunity of success (in the first model) and the higher product value (in the second model). In the first model, each RJV's project results in a binary outcome: success or failure. An additional partner to an RJV simply enhances the possibility of success.;The second model allows an RJV to choose after finishing the first development between conducting further R&D to improve its product value, and selling its current product to the final market for two periods. If an RJV would rather develop, its size is adjustable. An RJV size either stays constant, or expands in the first and shrinks in the second model. The effect of an increase in the discount factor, which is zero for complete discount and one for no discount, on the first period RJV's size relies upon the returns to scale of the probability of success in the first model. In the second model, the higher discount factor makes it more likely for an RJV to conduct further R&D after the first development.