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Horizontal Mergers and Product Innovation

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  • Valletti, Tommaso
  • Langus, Gregor
  • Federico, Giulio

Abstract

We set up a stylized oligopoly model of uncertain product innovation to analyze the effects of a merger on innovation incentives and on consumer surplus. The model incorporates two competitive channels for merger effects: the "price coordination" channel and the internalization of the "innovation externality". We solve the model numerically and find that price coordination between the two products of the merged firm tends to stimulate innovation, while internalization of the innovation externality depresses it. The latter effect is stronger in our simulations and, as a result, the merger leads to lower innovation incentives for the merged entity, absent cost efficiencies and knowledge spillovers. In our numerical analysis both overall innovation and consumer welfare fall after a merger.

Suggested Citation

  • Valletti, Tommaso & Langus, Gregor & Federico, Giulio, 2018. "Horizontal Mergers and Product Innovation," CEPR Discussion Papers 12759, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12759
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    References listed on IDEAS

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    More about this item

    Keywords

    Innovation; R&d; Mergers;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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