Innovation, merger policy and technology transfer

We consider the interactions between innovation and merger policy under different assumptions on technology transfer. In the absence of licencing, we show that in some cases the government must commit to a permissive policy to ensure that socially desirable innovations take place, while in other cases it must commit to a prohibitive policy to deter socially wasteful innovation investments. We also find that in some circumstances the absence of any commitment is socially necessary to ensure that innovation takes place, although mergers are finally allowed. In contrast with recent literature on licensing, we show that a permissive merger policy can be optimal even if royalties and fees are available in licensing.