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

Abstract

Using novel data from the pharmaceutical industry, we study product prices and innovation
around mergers. Exploiting within-deal variation in product market consolidation, we show prices
increase more within drugs in consolidating markets than within matched control drugs. Estimates
indicate a 2% average price effect that persists for about one year. Price increases expand with
acquirer-target product similarity and are more pronounced within less competitive product markets
with fewer players and no generic competition. Examination of trade-offs reveals these deals
generate significant shareholder value. They also spur labeling and other manufacturing-related
innovation, but not the creation of new drugs.

Keywords: Mergers and acquisitions, product market competition, innovation, pharmaceuticals

JEL Classification: G30, G34, O30, L11