Vol. 71 (2000), No. 3, pp. 281 304 Journal of Economics Zeitschrift for National6konomie 9 Springer-Verlag 2000 - Printed in Austria Cooperation in R&D and Production: a Three-Firm Analysis Tarun Kabiraj and Arijit Mukherjee Received October 29, 1997; revised version received October 6, 1999 The paper analyzes, in a model of quantity-setting three firms, the interaction between cooperation decisions at the R&D stage and merger decisions at the production stage. We assume that only two of the three firms are capable of doing cost-reducing research. Two types of cooperative research, viz., the knowledge-sharing agreement and research joint venture are considered. Cost reduction in the case of a successful research joint venture is larger compared to knowledge sharing or independent research, due to possible synergies. We show that allowing mergers can change the organization of the R&D process, and admitting cooperative research can affect the occurrence and nature of mergers at the production stage. Keywords: knowledge sharing, research joint venture, merger, innovation. JEL classification: L13, D43, 033. 1 Introduction Antitrust laws generally encourage cooperation in R&D but often prevent cooperation in production. Is there any link between these two? The pur- pose of this paper is to explore this question in terms of a three-firm frame- work. This question may be important because governments may want to promote cooperation in R&D for certain reasons, and hence may allow firms to cooperate in production. We show that allowing cooperation in production does not necessarily provide incentives for firms to cooperate in R&D. We consider both knowledge sharing (KS) and research joint ven- ture (RJV) to be forms of cooperative research. We also consider mergers to be a form of cooperation in production. Cooperation in R&D may arise for various reasons. First, large modern