Mergers and Innovation Portfolios

52 Pages Posted: 10 Dec 2019

See all articles by José L. Moraga-González

José L. Moraga-González

VU University Amsterdam; University of Groningen

Evgenia Motchenkova

VU University Amsterdam - Department of Economics; TILEC

Saish Nevrekar

Universidad Carlos III de Madrid

Multiple version iconThere are 3 versions of this paper

Date Written: December 6, 2019

Abstract

This paper studies mergers in markets where firms invest in a portfolio of research projects of different profitability and social value. The portfolio nature of the investment problem brings about novel insights on the external effects of firms’ investments. The investment of a firm in one project imposes a negative business-stealing externality on the rival firms because it lowers the probability they win the innovation contest for that project; however, the investment of a firm in one project also exerts a positive business-giving externality on the rival firms because it increases the likelihood they win the contest for the alternative project.

Merging firms internalize these positive and negative externalities they impose on each other. We show that when the project that is relatively more profitable for the firms is also the more appropriable, then a merger increases consumer welfare by reducing investment in the most profitable project and increasing investment in the alternative (less profitable) project. For the case of linear demand and constant marginal costs, the portfolio effect of mergers makes them consumer welfare improving. With constant elasticity of demand and constant marginal costs, a merger increases consumer welfare if the more profitable project corresponds to the market with the higher elasticity of demand. The portfolio effect of mergers may dominate the usual market power effects of mergers.

Keywords: innovation portfolios, R&D contests, mergers

JEL Classification: L13, L22, O31, O32

Suggested Citation

Moraga-Gonzalez, Jose Luis and Motchenkova, Evgenia and Nevrekar, Saish, Mergers and Innovation Portfolios (December 6, 2019). TILEC Discussion Paper No. DP 2019-026, Available at SSRN: https://ssrn.com/abstract=3500765 or http://dx.doi.org/10.2139/ssrn.3500765

Jose Luis Moraga-Gonzalez

VU University Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

HOME PAGE: http://www.tinbergen.nl/~moraga/

University of Groningen

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV
Netherlands

Evgenia Motchenkova

VU University Amsterdam - Department of Economics ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Saish Nevrekar (Contact Author)

Universidad Carlos III de Madrid ( email )

Calle Madrid 126
Getafe, 28903
Spain

HOME PAGE: http://saishnevrekar.com

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