Horizontal Mergers and Innovation in Concentrated Industries

Quantitative Marketing and Economics, 2020, Vol 18, p. 1-37

47 Pages Posted: 24 Jun 2015 Last revised: 12 Mar 2020

See all articles by Brett Hollenbeck

Brett Hollenbeck

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: May 19, 2019

Abstract

It is an open question in antitrust economics whether allowing dominant firms to acquire smaller rivals is ultimately helpful or harmful to the long run rate of innovation and therefore long-term consumer welfare. I develop a framework to study this question in a dynamic oligopoly model where firms endogenously investment, entry, exit and engage in mergers. Firms produce vertically differentiated goods, compete by innovating on product quality, and can acquire rival firms to gain market power. In a benchmark model, mergers are modeled to be exclusively harmful to consumers in the short run by reducing competition and increasing prices. Despite this, under standard industry settings it is possible to show that the prospect of a buyout creates a powerful incentive for firms to preemptively enter the industry and invest to make themselves an attractive merger partner. The result is significantly higher rate of innovation with mergers than without and significantly higher long-run consumer welfare as well. Further results explore the circumstances under which this result is likely to hold. In order for the long run increase in innovation to outweigh the short run harm to consumers caused by mergers, entry costs must be low, entrants and incumbents must both have the ability to innovate rapidly, and the degree of horizontal product differentiation must be low. Alternatively, when dominant firms can directly incorporate the acquired firm’s innovation into their own product, mergers will typically benefit consumers in both the short run and long run.

Keywords: Antitrust, innovation, dynamic oligopoly, mergers

Suggested Citation

Hollenbeck, Brett, Horizontal Mergers and Innovation in Concentrated Industries (May 19, 2019). Quantitative Marketing and Economics, 2020, Vol 18, p. 1-37 , Available at SSRN: https://ssrn.com/abstract=2621842 or http://dx.doi.org/10.2139/ssrn.2621842

Brett Hollenbeck (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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