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

Abstract

Using novel data from the pharmaceutical industry, we study the impact of mergers on product prices and innovation. Drugs produced by acquiring firms increase in price approximately 5% more than products sold by matched non-acquiring firms, and these price increases are more pronounced for deals resulting in greater market power consolidation. Consistent with causal identification of enhanced market power around mergers, price increases are significantly greater within drug classes with acquirer/target overlap but absent for drugs already shielded from competition through patents and exclusivity rights. 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