Are Anticompetitive Innovation Mergers Privately Profitable? An Exploratory Analysis

Michael Cragg (The Brattle Group), Daniel Gaynor (The Brattle Group) and John David Simpson (The Brattle Group) ask Are Anticompetitive Innovation Mergers Privately Profitable? An Exploratory Analysis.

ABSTRACT: A significant number of proposed mergers involve the combination of two of only a small set of firms capable of the type of drastic innovation that will create new products. A potential anti-competitive concern in such mergers is that the merged firm might terminate the innovative effort at one of the merging partners, thereby reducing competition to innovate. While preliminary, the results of this paper suggest that such an anticompetitive effect is unlikely in three to two mergers or higher.

Specifically, this paper focuses on a comparison of two cases across several different competitive environments. In the first case, three firms each pursue an innovative opportunity; in the second case, two of the three firms merge, and the merged firm pursues only one innovative opportunity. In the examples that we consider, a merger in which the merged firm terminates one of its two innovation efforts is only profitable if the merged firm obtains substantial efficiencies in the innovation process. In many cases, the size of the efficiencies required to make the merger profitable means that the merger is likely to increase both the level of innovation and consumer welfare.