We investigate the effect of potential entry on the formation and stability of R&D networks
considering farsighted firms. We show that the presence of a potential entrant often alters the
incentives of incumbent firms to establish a link. In particular, incumbent firms may choose to
form an otherwise undesirable collaboration in order to deter the entry of a new firm. Moreover,
an incumbent firm may refrain from establishing an otherwise desirable collaboration, expecting
to form a more profitable link with the entrant. Finally, potential entry may lead an inefficient
incumbent to exit the market. We also perform a welfare analysis that shows market and social
incentives to be often misaligned and we propose a subsidy scheme that encourages welfare
improving entry.
