A Simple Model of Mergers and Innovation

Giulio Federico ; Gregor Langus ; Tommaso M. Valletti offer A Simple Model of Mergers and Innovation.

ABSTRACT: We analyze the impact of a merger on firms incentives to innovate. We show that the merging parties always decrease their innovation efforts post-merger while the outsiders to the merger respond by increasing their effort. A merger tends to reduce overall innovation. Consumers are always worse off after a merger. Our model calls into question the applicability of the inverted-U relationship between innovation and competition to a merger setting.