Mergers and Investments in New Products

Abstract

We investigate the impact of a horizontal merger between two competitors on their incentives to invest in R&D that generates new products. We show that a merger raises the incentives to innovate if and only if the merged entity’s incremental gain from a second innovation is greater than the individual profit of a firm when both firms innovate in the no-merger scenario. Applying this result to the Hotelling model, we find that a merger spurs innovation if the degree of product differentiation is not too high, and show that a merger can be beneficial to consumers.

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Reference

Bruno Jullien, and Yassine Lefouili, “Mergers and Investments in New Products”, TSE Working Paper, n. 18-949, August 2018, revised August 2020.