Horizontal Mergers and Product Innovation

23 Pages Posted: 6 Mar 2018

See all articles by Giulio Federico

Giulio Federico

Chief Economist Team, DG Competition, European Commission

Gregor Langus

European Union - European Commission

Tommaso M. Valletti

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

Date Written: February 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: Innovation, mergers, R&D

JEL Classification: D43, G34, L40, O30

Suggested Citation

Federico, Giulio and Langus, Gregor and Valletti, Tommaso M., Horizontal Mergers and Product Innovation (February 2018). CEPR Discussion Paper No. DP12759. Available at SSRN: https://ssrn.com/abstract=3134410

Giulio Federico (Contact Author)

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

Gregor Langus

European Union - European Commission ( 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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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