This paper considers the impact of price-cap regulation on R&D and the
incentive of firms to form research joint ventures. Using a symmetric two-stage
duopoly model of cost-reducing R&D with multiple forms of research cooperation,
we find that R&D is greatest when firms fully cooperate in research and share all
research knowledge. Price-cap regulation, however, appears to have a small but
negative effect on R&D, leading to lower total welfare.
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