Monday, September 26, 2016
Christos Cabolis, IMD World Competitiveness Center; ALBA Graduate Business School; Yale SOM International Center for Finance, Constantine Manasakis, University of Crete - Department of Economics, Diego Moreno, Universidad Carlos III de Madrid - Department of Economics, and Emmanuel Petrakis, University of Crete - Department of Economics examine R&D Investments Fostering Horizontal Mergers.
ABSTRACT: We study a homogenous good triopoly in which firms first choose their cost-reducing R&D investments and consider alternative merger proposals, and then compete a la Cournot in the ensuing industry. We identify conditions under which both horizontal mergers and non-integration are sustained by Coalition-Proof Nash equilibria (CPNE). These conditions involve the effectiveness of the R&D technology, as well as the distribution of the bargaining power between the acquirer and the acquiree, which determine the allocation of the incremental profits generated by the merger. We show that whether firms follow duplicative or complementary research paths, sustaining a merger generally requires a sufficiently effective R&D technology that creates endogenous cost asymmetries and renders the merger profitable, and a moderate distribution of bargaining power that allows to spread the benefits of the merger. We examine the welfare effects of mergers and obtain clear policy guidelines.