Thursday, May 17, 2018

Horizontal Mergers and Product Innovation

Giulio Federico, Chief Economist Team, DG Competition, European Commission; Barcelona Graduate School of Economics (Barcelona GSE), Gregor Langus, European Union - European Commission, and Tommaso M. Valletti, Imperial College Business School; University of Rome, Tor Vergata - Department of Financial and Quantitative Economics; Centre for Economic Policy Research (CEPR) address Horizontal Mergers and Product Innovation.

ABSTRACT: We set up a stylized oligopoly model of uncertain product innovation to analyze the effects of a merger on innovation incentives and on consumer surplus. The model incorporates two competitive channels for merger effects: the "price coordination" channel and the internalization of the "innovation externality". We solve the model numerically and find that price coordination between the two products of the merged firm tends to stimulate innovation, while internalization of the innovation externality depresses it. The latter effect is stronger in our simulations and, as a result, the merger leads to lower innovation incentives for the merged entity, absent cost efficiencies and knowledge spillovers. In our numerical analysis both overall innovation and consumer welfare fall after a merger.

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