A Simple Model of Mergers and Innovation

15 Pages Posted: 21 Jul 2017

See all articles by Giulio Federico

Giulio Federico

Chief Economist Team, DG Competition, European Commission

Gregor Langus

European Commission, Chief Economist Team

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Date Written: June 29, 2017

Abstract

We analyze the impact of a merger on firms’ incentives to innovate. We show that the merging parties always decrease their innovation efforts post-merger while the outsiders to the merger respond by increasing their effort. A merger tends to reduce overall innovation. Consumers are always worse off after a merger. Our model calls into question the applicability of the “inverted-U” relationship between innovation and competition to a merger setting.

Keywords: innovation, R&D, mergers

JEL Classification: D430, G340, L400, O300

Suggested Citation

Federico, Giulio and Langus, Gregor and Valletti, Tommaso M., A Simple Model of Mergers and Innovation (June 29, 2017). CESifo Working Paper Series No. 6539. Available at SSRN: https://ssrn.com/abstract=3005163

Giulio Federico

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

Gregor Langus

European Commission, Chief Economist Team ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Tommaso M. Valletti (Contact Author)

Imperial College Business School ( email )

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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