Horizontal Mergers and Product Innovation: An Economic Framework
19 Pages Posted: 19 Jul 2017
Date Written: July 10, 2017
We set up a stylized oligopoly model of uncertain product innovation to analyze the possible effects of a merger on innovation incentives. The model incorporates two key competitive channels for merger effects: the "price coordination" and "innovation externality" channels. We find that price coordination between the merging parties stimulates innovation, while internalization of the innovation externality depresses it. The latter effect tends to be stronger and as a result the merger leads to lower innovation incentives for the merged entity, absent efficiencies. In our model, overall industry innovation falls as a result of a merger. We also present a qualitative discussion of possible innovation-related efficiencies.
Keywords: Mergers, innovation, efficiencies
JEL Classification: L40, O31
Suggested Citation: Suggested Citation