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.

Horizontal Mergers and Innovation

“…In contrast, Bourreau, Lefouili and Jullien (2018) show that the analysis by Motta and Tarantino (2017) of the e¤ect of mergers on product innovation 19 and the analysis by Federico, Langus and Valletti (2017b) rely on classes of demand functions for which the main e¤ect at work is the margin expansion e¤ect. This explains why they get a negative impact of mergers on innovation.…”

“…Suppose now that the incumbent acquires the innovator before R&D takes place. Endowed with the 1 1 We use the same terminology as Farrell and Shapiro (2010) and Federico, Langus and Valletti (2017b). innovating …rm's R&D technology, the incumbent will account not only for the sales of the new product but also for the lost sales on the old product when evaluating the gain from a successful investment.…”

“…Unlike a price reduction in a price competition game, an increase in R&D activity by one …rm does not always hurt its competitors. The reason is that there are several ways through which R&D allows a …rm to 1 2 The same applies for Federico, Langus and Valletti (2017b). make additional pro…ts.…”

“…In particular, the authors perform this exercise for the models used in the analysis of product innovation by Motta and Tarantino (2017) and by Federico, Langus and Valletti (2017b). 21 A …rst class of models considered by both papers is one in which all consumers attach the same value to a unit increase in quality, which implies that increasing quality has the same e¤ect on demand as decreasing prices.…”

“…Bourreau, Lefouili and Jullien (2018) show formally that in the framework they consider, i.e., demand-enhancing innovation in an industry which is symmetric before the merger, most demand speci…cations considered by Federico, Langus and Valletti (2017b) and Motta and Tarantino (2017) can only lead to the conclusion that a merger will impede innovation.…”