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Mergers, Innovation Efficiencies, and the Investment Channel

Author

Listed:
  • Pietola, Matias
  • Tarantino, Emanuele
  • Zenger, Hans

Abstract

We study how mergers affect innovation and buyer surplus when suppliers invest before competing for a contract awarded to the best supplier. The merger’s effect on innovation decomposes into a Schumpeterian effect (larger profit base) and an Arrowian effect (lost rivalry). Without synergies, these cancel exactly: the merger is innovation neutral and harms the buyer by the merger premium. Private and social investment incentives are aligned, so merger specific synergies always increase total welfare. However, the buyer benefits only indirectly, through competitive pressure the stronger merged entity exerts on outsiders, and only if the innovation gain exceeds the merger premium. In the presence of external spillovers the merger can be more detrimental to welfare. A joint venture that coordinates investment while preserving competition avoids the premium and, in our numerical analysis, benefits the buyer more than the merger across all specifications.

Suggested Citation

  • Pietola, Matias & Tarantino, Emanuele & Zenger, Hans, 2026. "Mergers, Innovation Efficiencies, and the Investment Channel," CEPR Discussion Papers 21529, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21529
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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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