Horizontal Mergers and Product Innovation

20 Pages Posted: 19 Jul 2017 Last revised: 28 Mar 2018

Giulio Federico

Chief Economist Team, DG Competition, European Commission; Barcelona Graduate School of Economics (Barcelona GSE)

Gregor Langus

European Commission, Chief Economist Team

Tommaso M. Valletti

Imperial College Business School; University of Rome, Tor Vergata - Department of Financial and Quantitative Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 26, 2018

Abstract

We set up a stylized oligopoly model of uncertain product innovation to analyze the effects of a merger on innovation incentives and on consumer surplus. The model incorporates two competitive channels for merger effects: the "price coordination" channel and the internalization of the "innovation externality". We solve the model numerically and find that price coordination between the two products of the merged firm tends to stimulate innovation, while internalization of the innovation externality depresses it. The latter effect is stronger in our simulations and, as a result, the merger leads to lower innovation incentives for the merged entity, absent cost efficiencies and knowledge spillovers. In our numerical analysis both overall innovation and consumer welfare fall after a merger.

Keywords: Mergers, innovation, efficiencies

JEL Classification: D43, G34, L13, L40, O30, O31

Suggested Citation

Federico, Giulio and Langus, Gregor and Valletti, Tommaso M., Horizontal Mergers and Product Innovation (February 26, 2018). Available at SSRN: https://ssrn.com/abstract=2999178 or http://dx.doi.org/10.2139/ssrn.2999178

Giulio Federico

Chief Economist Team, DG Competition, European Commission ( email )

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Gregor Langus (Contact Author)

European Commission, Chief Economist Team ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Tommaso M. Valletti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

University of Rome, Tor Vergata - Department of Financial and Quantitative Economics ( email )

Via Columbia n.2
Roma, 00133
Italy

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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