Collaboration Networks in a Hotelling Game

The paper investigates the stability and efficiency of R&D collaboration in a three-firm Hotelling game. Firms are assumed to be horizontally and vertically differentiated and to provide public services where price is thus set by the regulator. We show that firm-quality effort decreases with the number of links. Nonetheless, a conflict between stability and efficiency is likely to occur. We show that the complete network is uniquely stable but efficient only for a sufficiently low level of spillover rate. As a result, an over-connection problem may arise. However, for high spillover rates, the welfare-superior networks tend to be denser provided that the horizontal differentiation is low.