Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry

60 Pages Posted: 7 Sep 2019 Last revised: 9 Feb 2020

See all articles by Alice A. Bonaime

Alice A. Bonaime

University of Arizona

Ye (Emma) Wang

University of Arizona - Department of Finance

Date Written: March 15, 2019

Abstract

Using novel data from the pharmaceutical industry, we study the impact of mergers on product prices and innovation. Drug prices increase 2.7-5.6% more within acquiring pharmaceutical firms than matched control firms, and elevated prices persist up to two years. Exploiting cross-sectional heterogeneity in expected change in market power across deals and products, we find price increases are more pronounced for deals that consolidate market power more and absent for drugs already shielded from competition through patents and exclusivity rights. Yet, product lines shared by the bidder and target are not impacted more than non-overlapping product lines. Collectively, our findings are consistent with the effects of market power consolidation from mergers outweighing synergistic gains and suggest merged firms exercise market power by capitalizing on their larger scale. We find no evidence of mergers facilitating or incentivizing innovation - a potential tradeoff to higher product prices.

Keywords: Mergers and acquisitions, product market competition, innovation, pharmaceuticals, drug prices, new drug approval

JEL Classification: G30, G34, H51, I18

Suggested Citation

Bonaime, Alice A. and Wang, Ye, Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry (March 15, 2019). Available at SSRN: https://ssrn.com/abstract=3445753 or http://dx.doi.org/10.2139/ssrn.3445753

Alice A. Bonaime (Contact Author)

University of Arizona ( email )

Eller College of Management
Department of Finance
Tucson, AZ 85721
United States

Ye Wang

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tuscon, AZ 85721
United States

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