Working Paper: CEPR ID: DP12759
Authors: Giulio Federico; Gregor Langus; Tommaso Valletti
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.
Keywords: innovation; R&D; mergers
JEL Codes: D43; G34; L40; O30; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| horizontal merger (L22) | reduction in innovation incentives (O39) |
| price coordination (L11) | increase in profits associated with successful innovations (O39) |
| innovation externality (O36) | decrease in innovation incentives (O31) |
| horizontal merger (L22) | decline in overall innovation (O39) |
| horizontal merger (L22) | decline in consumer welfare (F61) |
| price coordination (L11) | stimulate innovation (O35) |
| reduction in expected profits from innovation (O39) | downward pressure on innovation efforts (O36) |