The Effect of a Merger on Investments

41 Pages Posted: 10 Oct 2016

See all articles by Massimo Motta

Massimo Motta

Universitat Pompeu Fabra

Emanuele Tarantino

University of Mannheim - Department of Economics; Tilburg Law and Economics Center (TILEC)

Date Written: October 2016

Abstract

It has been suggested that mergers, by increasing profitability, will also result in higher investments. To deal with this claim, we first study a general model with simultaneous cost-reducing investments and price choices. Absent scope economies, the merger is anti-competitive: it lowers both total output and investment. With sequential choices, we provide a sufficient condition in a general model for the merger to be anti-competitive. The results are confirmed in a standard Shubik-Levitan parametric model. Only if the merger entails sufficient scope economies, will it be pro-competitive. We also show that a Network Sharing Agreement (by which parties set their investment cooperatively) is preferable to a merger. Finally, we identify a class of models where the same qualitative results extend to quality-enhancing investments.

Keywords: Horizontal mergers, innovation, Investments, Network-sharing Agreements

Suggested Citation

Motta, Massimo and Tarantino, Emanuele, The Effect of a Merger on Investments (October 2016). CEPR Discussion Paper No. DP11550. Available at SSRN: https://ssrn.com/abstract=2850392

Massimo Motta (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Emanuele Tarantino

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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