DP16031 Mergers and Demand-Enhancing Innovation

Author(s): Marc Bourreau, Bruno Jullien, Yassine Lefouili
Publication Date: April 2021
Keyword(s): Competition, Horizontal mergers, Innovation
JEL(s): D43, L13, L40
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16031

We study the impact of horizontal mergers on merging firms' incentives to invest in demand-enhancing innovation. In our baseline model, we identify four effects of a symmetric merger on these incentives: the innovation diversion effect, the margin expansion effect, the demand expansion effect, and the per unit return to innovation effect. We offer sufficient conditions for a merger to reduce or raise merging firms' incentives to innovate in the absence of spillovers and efficiency gains in R&D, and find that a comparison between the innovation diversion and price diversion ratios is informative about the impact of a merger on innovation.