Friday, August 31, 2018

Mergers and R&D Diversity: How Much Competition is Enough?

Rich Gilbert, Berkeley asked Mergers and R&D Diversity: How Much Competition is Enough?

ABSTRACT: This paper describes a simple model of research and development investment in which firms can choose any number of R&D projects that have independent and identical probabilities of success. The measure of R&D diversity is the number of projects undertaken by an industry. Innovations are drastic. Mergers can reduce incentives to invest in R&D through business-stealing effects: a party to a merger does not value profits from a discovery that occur at the expense of its merger partner. The model shows that competition generally (but not always) increases R&D diversity, but the incremental effects from a merger are small if the industry has more than five or six rivals that compete to innovate prior to the merger, provided that the merger does not increase the profits that are at risk from innovation. Mergers can have significant adverse effects if the merging firms have large profits that can be replaced by an innovation. A merger can promote investment in R&D if rivals can benefit from information spillovers by imitating a discovery.

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