Comment on 'Mergers in Patent Contest Models with Synergies and Spillovers'

Abstract

Peter-J. Jost and Claus van der Velden, the authors, discuss a very interesting problem. They ask whether horizontal mergers may be profitable. Their starting point is a well-known result from Salant, Switzer, and Reynolds (1983). They show in a conventional Cournot oligopoly framework that a horizontal merger can hardly be profitable for the merging firms. The merging firms, the insiders, realize some cost advantage after the merger and therefore reduce their output. The non-participating firms, the outsiders, realize that aggregate demand does not change due to the merger and expand their output, given the aggregate output of the insiders. Thus, the sum of the profits of the insiders decreases. When the profit reduction due to the output decision of the outsiders is greater than the cost efficiencies that motivated the merger, then the sum of the insiders' profits may be smaller after the merger.

The authors examine a research-intensive industry. There are n firms engaged in a patent race. Winning the race results in a large first-mover advantage that may endure for some years. The incentives to innovate are without any reasonable doubt very high. But on the other side, the firms may have an incentive to economize on costs. Depending on either the industry effects or the state of scientific progress, R&D expenditures may be very high for a single firm. These expenditures can be the motive for some of the involved firms to consider a merger. Thus, the authors discuss the trade-off between an incentive to innovate and an incentive to economize on costs.