Mergers, Innovation Efficiencies, and the Investment Channel

Matias Pietola, Emanuele Tarantino and Hans Zenger

No 21529, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how mergers affect innovation and buyer surplus when suppliers invest before competing for a contract awarded to the best supplier. The merger’s effect on innovation decomposes into a Schumpeterian effect (larger profit base) and an Arrowian effect (lost rivalry). Without synergies, these cancel exactly: the merger is innovation neutral and harms the buyer by the merger premium. Private and social investment incentives are aligned, so merger specific synergies always increase total welfare. However, the buyer benefits only indirectly, through competitive pressure the stronger merged entity exerts on outsiders, and only if the innovation gain exceeds the merger premium. In the presence of external spillovers the merger can be more detrimental to welfare. A joint venture that coordinates investment while preserving competition avoids the premium and, in our numerical analysis, benefits the buyer more than the merger across all specifications.

JEL-codes: D44 G34 L13 L41 O31 (search for similar items in EconPapers)
Date: 2026-05
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