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R&D investments fostering horizontal mergers

Christos Cabolis (), Constantine Manasakis (), Diego Moreno () and Emmanuel Petrakis ()

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: We study a homogenous good triopoly in which firms first choose their cost-reducing R&D investments and consider alternative merger proposals, and then compete à la Cournot in the ensuing industry. We identify conditions under which both horizontal mergers and non integration are sustained by Coalition-Proof Nash equilibria (CPNE). These conditions involve the effectiveness of the R&D technology, as well as the distribution of the bargaining power between the acquirer and the acquiree, which determine the allocation of the incremental profits generated by the merger. We show that whether firms follow duplicative or complementary research paths, sustaining a merger generally requires a sufficiently effective R&D technology that creates endogenous cost asymmetries and renders the merger profitable, and a moderate distribution of bargaining power that allows to spread the benefits of the merger. We examine the welfare effects of mergers and obtain clear policy guidelines.

Keywords: Horizontal; Mergers; Cost-Reducing; Innovation; Endogenous; Efficiency; Gains; Antitrust; Coalition-Proof; Nash; Equilibrium (search for similar items in EconPapers)
Date: 2016-06-01
New Economics Papers: this item is included in nep-com, nep-ind, nep-ino and nep-knm
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:23280

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