This paper investigates the impact of horizontal mergers on firms' incentives to invest in demand-enhancing innovation. In our baseline model, we identify three key effects of a merger on the merging firms' incentives to innovate: the margin expansion effect, the demand expansion effect, and the innovation diversion effect. The first effect is negative, while the second is positive and the third can be either positive or negative depending on the nature of the innovation. We show that the overall impact of a merger on innovation can be either positive or negative and provide sufficient conditions and specific models under which each of these two scenarios arises. Finally, we extend our model to incorporate spillovers and synergies in R&D.
Horizontal Mergers; Innovation; Competition;
- D43: Oligopoly and Other Forms of Market Imperfection
- L13: Oligopoly and Other Imperfect Markets
- L40: General
TSE Working Paper, n. 18-907, March 2018, revised July 2018