1. Cason: Department of Economics, Purdue University, 100 S. Grant Street, West Lafayette, IN 47907-2076. Phone 765-494-1737, Fax 765-494-9658, E-mail
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    1. Gangadharan: Department of Economics, Monash University, Clayton Campus, Victoria, Australia. Phone +61 3 9905 2345, Fax +61 3 9905 5476, E-mail
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    • We thank Cary Deck, Jim Murphy, Ralph Siebert, John Stranlund, Nori Tarui, Christian Vossler, two anonymous referees, an editor, and audiences at UNSW, La Trobe, Purdue, East Anglia, University of Montpellier, Economic Science Association conferences, and the World Congress of Environmental and Resource Economists (Montreal) for helpful discussions and comments. Justin Krieg provided excellent research assistance. Part of this research was conducted while Cason was a visiting fellow with the Department of Economics, University of Melbourne. This research has been supported by a grant from the U.S. Environmental Protection Agency's National Center for Environmental Research (NCER) Science to Achieve Results (STAR) program. Although the research described in the article has been funded in part through EPA grant number R833672, it has not been subjected to any EPA review and therefore does not necessarily reflect the views of the Agency, and no official endorsement should be inferred. Funding from the Australian Research Council contributed toward the payments for experimental subjects. We are responsible for any errors or omissions.


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. (JEL D43, D71, H40, O3)