This paper studies the impact of horizontal mergers on firms' incentives to invest in demand-enhancing innovation. In our symmetric baseline model, we identify four effects of a merger on innovation: the innovation diversion effect, the margin expansion effect, the demand expansion effect, and the per-unit return to innovation effect. The first two effects are negative, while the third one is positive, and the fourth one can be either positive or negative. We offer sufficient conditions for a merger to reduce or raise incentives to innovate in the absence of spillovers and synergies, and provide commonly used models in which they hold. Finally, we show that our approach can be extended to account for spillovers, synergies in R&D, synergies in production, and asymmetric demand and cost functions.
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 December 2019