Mergers in Innovative Industries: The Role of Product Market Competition

Posted by Social Science Research Network

Mergers in Innovative Industries: The Role of Product Market Competition

Guillermo Marshall (University of Illinois) & Alvaro Parra (University of British Columbia)

Abstract:      We study how competition affects innovation (and welfare) when firms compete both in the product market and in innovation development. This relationship is complex and may lead to scenarios in which a lessening of competition increases R&D and consumer welfare in the long run, which is in contrast to arguments provided by antitrust agencies in recent merger cases. We provide conditions for when a merger increases industry innovation and when evaluating mergers based on static price effects is aligned with a fully dynamic merger evaluation. These conditions are based on properties of the product market payoffs.