Michael König (Universität Zürich) – Network Formation with Local Complements and Global Substitutes

In this paper we analyze R&D collaboration networks in industries where firms are competitors in the product market. Firms’ benefits from collaborations arise by sharing knowledge about a cost-reducing technology. By forming collaborations, however, firms also change their own competitive position in the market as well as the overall market structure. We provide a general characterization of both equilibrium networks and endogenous production choices in the form of a Gibbs measure. We find that there exists a sharp transition from sparse to dense networks, and low and high output levels, respectively, with decreasing linking costs. Moreover, there exists an intermediate range of the linking cost for which multiple equilibria arise. The equilibrium selection is a path dependent process characterized by hysteresis. We also allow for firms to differ in their technological characteristics, investigate how this affects their propensity to collaborate and study the resulting network structure. We then analyze the efficient network maximizing social welfare, and find that the efficient graph is either empty, complete or shows a strong core periphery structure. We then estimate the model using a unique dataset on R&D collaborations and show that it can reproduce the empirically observed patterns. Finally, we perform a dynamic key player analysis, where we analyze the effect on welfare and industry production when a firm is removed from the network, taking into account that the network and production can dynamically adjust to shocks.