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Horizontal Mergers and Product Innovation: An Economic Framework

19 Pages Posted: 19 Jul 2017  

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: July 10, 2017

Abstract

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

Federico, Giulio and Langus, Gregor and Valletti, Tommaso M., Horizontal Mergers and Product Innovation: An Economic Framework (July 10, 2017). Available at SSRN: https://ssrn.com/abstract=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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