Working Paper: CEPR ID: DP16031
Authors: Marc Bourreau; Bruno Jullien; Yassine Lefouili
Abstract: We study the impact of horizontal mergers on the incentives of merging firms to invest in incremental innovation. We provide a decomposition of this impact that clarifies the various forces at work and the differences between demand-enhancing and cost-reducing innovation. Moreover, we derive sufficient conditions for a merger to either reduce or raise the merging firms' incentives to innovate, and show that the comparison of the price diversion ratio and the innovation diversion ratio can help screen mergers. We also uncover a useful connection between the level of production synergies induced by a merger and its impact on innovation.
Keywords: horizontal mergers; innovation; competition
JEL Codes: D43; L13; L40
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 incentives to innovate (O39) |
| merger leads to lower output at a given innovation level (L15) | negative impact on innovation incentives (O36) |
| strong efficiency gains (D61) | increased output and positive incentives (O49) |
| merger (G34) | enhances incentives to innovate (O31) |
| merger's impact on output and pricing (L11) | per unit return to innovation (O39) |
| comparison of innovation diversion ratio and price diversion ratio (O39) | overall impact of a merger on innovation incentives (O36) |
| price diversion ratio < innovation diversion ratio (O39) | negative impact on innovation (O36) |