Horizontal Mergers and Innovation in Concentrated Industries

Posted by Social Science Research Network

Horizontal Mergers and Innovation in Concentrated Industries Brett Hollenbeck (University of California)

Abstract: Antitrust authorities are increasingly concerned with the question: does allowing rival firms to merge increase or decrease incentives to invest and innovate? I examine this question in a dynamic oligopoly model with endogenous horizontal mergers. Firms produce differentiated goods and compete in prices and may merge with rival firms to increase the quality of their product or may continue to produce both products. The model is solved computationally and several counterfactuals are examined. I show that large firms substitute buyouts for investment but that this process creates a powerful incentive for firms to enter the industry and invest to make themselves an attractive merger partner. The result is significantly higher total investment with mergers than without. This result helps shed light on the larger question of the relationship between the competition and innovation.