Discussion paper

DP16031 Mergers and Demand-Enhancing Innovation

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.


Bourreau, M, B Jullien and Y Lefouili (eds) (2021), “DP16031 Mergers and Demand-Enhancing Innovation”, CEPR Press Discussion Paper No. 16031. https://cepr.org/publications/dp16031