Mergers in Multidimensional Competition

Abstract

In reality, horizontal mergers are often driven by the opportunities they create for the exploitation of R&D complementarities. An example is the BP/ ARCO mega-merger, approved in 2000, where a central justification was that integration - by committing the firms to sharing their accumulated technical expertise - would significantly reduce extraction costs at the enormous Prudhoe Bay oil field in Alaska. We investigate the positive features of a prior bilateral merger to exploit R&D complementarities in a game where oligopolists compete both in process R&D and on the product market. For a non-trivial degree of complementarity between firms' R&D stocks, we show that a bilateral merger has the following intuitively-appealing features independently of the assumed strategic variable in market competition (price vs. quantity): (a) insiders benefit; (b) outsiders are harmed; and (c) insiders end up larger than outsiders. These results represent a significant advance on the findings of traditional models of merger to achieve market power alone, which are well known to be both counterintuitive and highly sensitive to the (unobservable) mode of product market competition.

Keywords: horizontal merger, R&D complementarities, endogenous R&D, merger paradox

JEL Classification: L11, L41, 031