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

ECA Economics GmbH

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 or http://dx.doi.org/10.2139/ssrn.3005163

Giulio Federico

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

Gregor Langus

ECA Economics GmbH ( email )

Avenue Louise 500
Brussels
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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