[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/90764.html
   My bibliography  Save this paper

Horizontal Mergers and Innovation in Concentrated Industries

Author

Listed:
  • Hollenbeck, Brett
Abstract
The relationship between mergers and the long run rate of innovation is an open question in antitrust economics. I develop a framework to examine this in a dynamic oligopoly model with endogenous investment, entry, exit and horizontal mergers. Firms produce vertically differentiated goods and may merge with rival firms to gain market power and potentially increase the quality of their product. I extend previous work on dynamic mergers by allowing for products differentiated on quality with competition in prices and an endogenous long run rate of innovation. In equilibrium, horizontal mergers are almost entirely harmful to consumers in the short run, but the prospect of a buyout creates a powerful incentive for firms to preemptively enter the industry and invest to make themselves an attractive merger partner. The result is significantly higher rate of innovation with mergers than without and significantly higher long-run consumer welfare as well. Further results explore the circumstances under which this result is likely to hold. In order for the long run increase in innovation to outweigh the short run harm to consumers caused by mergers, entry costs must be low, entrants and incumbents must both have the ability to innovate rapidly, and the degree of horizontal product differentiation must be low. Alternatively, when mergers can generate innovation directly by allowing firms to combine their products they typically benefit consumers in both the short run and long run.

Suggested Citation

  • Hollenbeck, Brett, 2018. "Horizontal Mergers and Innovation in Concentrated Industries," MPRA Paper 90764, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:90764
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/90764/1/MPRA_paper_90764.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/95607/5/MPRA_paper_95607.pdf
    File Function: revised version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/95640/1/MPRA_paper_95640.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Daniel A. Ackerberg & Marc Rysman, 2005. "Unobserved Product Differentiation in Discrete-Choice Models: Estimating Price Elasticities and Welfare Effects," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 771-788, Winter.
    2. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    3. Ulrich Doraszelski & Mark Satterthwaite, 2010. "Computable Markov‐perfect industry dynamics," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 215-243, June.
    4. Gilbert Richard J, 2006. "Competition and Innovation," Journal of Industrial Organization Education, De Gruyter, vol. 1(1), pages 1-23, December.
    5. Daron Acemoglu & Ufuk Akcigit, 2012. "Intellectual Property Rights Policy, Competition And Innovation," Journal of the European Economic Association, European Economic Association, vol. 10(1), pages 1-42, February.
    6. Acemoglu, Daron & Cao, Dan, 2015. "Innovation by entrants and incumbents," Journal of Economic Theory, Elsevier, vol. 157(C), pages 255-294.
    7. Kwang-Soo Cheong, "undated". "Mergers and Dynamic Oligopoly," Computing in Economics and Finance 1997 126, Society for Computational Economics.
    8. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(1), pages 53-82.
    9. Ariel Pakes & Paul McGuire, 1994. "Computing Markov-Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 555-589, Winter.
    10. Ronald Goettler & Brett Gordon, 2014. "Competition and product innovation in dynamic oligopoly," Quantitative Marketing and Economics (QME), Springer, vol. 12(1), pages 1-42, March.
    11. Ilya Segal & Michael D. Whinston, 2007. "Antitrust in Innovative Industries," American Economic Review, American Economic Association, vol. 97(5), pages 1703-1730, December.
    12. Martin Pesendorfer, 2005. "Mergers Under Entry," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 661-679, Autumn.
    13. Mitsukuni Nishida & Nathan Yang, 2014. "Better Together? Retail Chain Performance Dynamics in Store Expansion Before and After Mergers," Working Papers 14-08, NET Institute.
    14. Ronald L. Goettler & Brett R. Gordon, 2011. "Does AMD Spur Intel to Innovate More?," Journal of Political Economy, University of Chicago Press, vol. 119(6), pages 1141-1200.
    15. Federico, Giulio & Langus, Gregor & Valletti, Tommaso, 2018. "Reprint of: Horizontal mergers and product innovation," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 590-612.
    16. Ron N. Borkovsky & Avi Goldfarb & Avery M. Haviv & Sridhar Moorthy, 2017. "Measuring and Understanding Brand Value in a Dynamic Model of Brand Management," Marketing Science, INFORMS, vol. 36(4), pages 471-499, July.
    17. Marshall, Guillermo & Parra, Álvaro, 2019. "Innovation and competition: The role of the product market," International Journal of Industrial Organization, Elsevier, vol. 65(C), pages 221-247.
    18. David Besanko & Ulrich Doraszelski & Yaroslav Kryukov & Mark Satterthwaite, 2010. "Learning-by-Doing, Organizational Forgetting, and Industry Dynamics," Econometrica, Econometric Society, vol. 78(2), pages 453-508, March.
    19. Federico, Giulio & Langus, Gregor & Valletti, Tommaso, 2017. "A simple model of mergers and innovation," Economics Letters, Elsevier, vol. 157(C), pages 136-140.
    20. Ron Borkovsky & Ulrich Doraszelski & Yaroslav Kryukov, 2012. "A dynamic quality ladder model with entry and exit: Exploring the equilibrium correspondence using the homotopy method," Quantitative Marketing and Economics (QME), Springer, vol. 10(2), pages 197-229, June.
    21. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    22. Motta, Massimo & Tarantino, Emanuele, 2021. "The effect of horizontal mergers, when firms compete in prices and investments," International Journal of Industrial Organization, Elsevier, vol. 78(C).
    23. Federico, Giulio & Langus, Gregor & Valletti, Tommaso, 2018. "Horizontal mergers and product innovation," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 1-23.
    24. Richard Gilbert, 2006. "Looking for Mr. Schumpeter: Where Are We in the Competition-Innovation Debate?," NBER Chapters, in: Innovation Policy and the Economy, Volume 6, pages 159-215, National Bureau of Economic Research, Inc.
    25. Chen, Jiawei, 2009. "The effects of mergers with dynamic capacity accumulation," International Journal of Industrial Organization, Elsevier, vol. 27(1), pages 92-109, January.
    26. Gautam Gowrisankaran, 1999. "A Dynamic Model of Endogenous Horizonal Mergers," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 56-83, Spring.
    27. Pakes, Ariel & McGuire, Paul, 2001. "Stochastic Algorithms, Symmetric Markov Perfect Equilibrium, and the 'Curse' of Dimensionality," Econometrica, Econometric Society, vol. 69(5), pages 1261-1281, September.
    28. Ahern, Kenneth R., 2012. "Bargaining power and industry dependence in mergers," Journal of Financial Economics, Elsevier, vol. 103(3), pages 530-550.
    29. Ben Mermelstein & Volker Nocke & Mark A. Satterthwaite & Michael D. Whinston, 2020. "Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy," Journal of Political Economy, University of Chicago Press, vol. 128(1), pages 301-341.
    30. Chaim Fershtman & Ariel Pakes, 2012. "Dynamic Games with Asymmetric Information: A Framework for Empirical Work," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(4), pages 1611-1661.
    31. John Hauser & Gerard J. Tellis & Abbie Griffin, 2006. "Research on Innovation: A Review and Agenda for," Marketing Science, INFORMS, vol. 25(6), pages 687-717, 11-12.
    32. Ben Mermelstein & Volker Nocke & Mark A. Satterthwaite & Michael D. Whinston, 2018. "Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy," CRC TR 224 Discussion Paper Series crctr224_038_2018, University of Bonn and University of Mannheim, Germany.
    33. Przemysław Jeziorski, 2014. "Estimation of cost efficiencies from mergers: application to US radio," RAND Journal of Economics, RAND Corporation, vol. 45(4), pages 816-846, December.
    34. Cohen, Wesley M., 2010. "Fifty Years of Empirical Studies of Innovative Activity and Performance," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 129-213, Elsevier.
    35. Aviv Nevo & Michael D. Whinston, 2010. "Taking the Dogma out of Econometrics: Structural Modeling and Credible Inference," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 69-82, Spring.
    36. John Asker & Chaim Fershtman & Jihye Jeon & Ariel Pakes, 2016. "The Competitive Effects of Information Sharing," NBER Working Papers 22836, National Bureau of Economic Research, Inc.
    37. Greenstein, Shane & Ramey, Garey, 1998. "Market structure, innovation and vertical product differentiation," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 285-311, May.
    38. Gowrisankaran, Gautam, 1999. "Efficient representation of state spaces for some dynamic models," Journal of Economic Dynamics and Control, Elsevier, vol. 23(8), pages 1077-1098, August.
    39. Harford, Jarrad, 2005. "What drives merger waves?," Journal of Financial Economics, Elsevier, vol. 77(3), pages 529-560, September.
    40. Ron N. Borkovsky, 2017. "The timing of version releases: A dynamic duopoly model," Quantitative Marketing and Economics (QME), Springer, vol. 15(3), pages 187-239, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Katz, Michael L., 2021. "Big Tech mergers: Innovation, competition for the market, and the acquisition of emerging competitors," Information Economics and Policy, Elsevier, vol. 54(C).
    2. Lefouili, Yassine & Madio, Leonardo, 2023. "Market Structure and Investments : A Progress Report," TSE Working Papers 23-1491, Toulouse School of Economics (TSE), revised Sep 2024.
    3. Nie, Pu-yan & Wang, Chan & Wen, Hong-xing, 2021. "Horizontal mergers under uniform resource constraints," Journal of Retailing and Consumer Services, Elsevier, vol. 63(C).
    4. Ben Mermelstein & Volker Nocke & Mark A. Satterthwaite & Michael D. Whinston, 2020. "Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy," Journal of Political Economy, University of Chicago Press, vol. 128(1), pages 301-341.
    5. Igor Letina & Armin Schmutzler & Regina Seibel, 2024. "Killer Acquisitions And Beyond: Policy Effects On Innovation Strategies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 591-622, May.
    6. Jean-Michel Benkert & Igor Letina & Shuo Liu, 2023. "Startup Acquisitions: Acquihires and Talent Hoarding," Papers 2308.10046, arXiv.org, revised Jul 2024.
    7. Jean-Michel Benkert, Igor Letina, Shuo Liu, 2023. "Startup Acquisitions: Acquihires and Talent Hoarding," Diskussionsschriften dp2309, Universitaet Bern, Departement Volkswirtschaft.
    8. Paolo Bova & Alessandro Di Stefano & The Anh Han, 2023. "Both eyes open: Vigilant Incentives help Regulatory Markets improve AI Safety," Papers 2303.03174, arXiv.org.
    9. Gilbert, Richard J. & Katz, Michael L., 2022. "Dynamic merger policy and pre-merger product choice by an entrant," International Journal of Industrial Organization, Elsevier, vol. 81(C).
    10. Christopher Teh & Dyuti Banerjee & Chengsi Wang, 2022. "Acquisition-induced kill zone," Monash Economics Working Papers 2022-24, Monash University, Department of Economics.
    11. Robert Clark & Mario Samano, 2022. "Incentivized Mergers and Cost Efficiency: Evidence from the Electricity Distribution Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 70(4), pages 791-837, December.
    12. Suguru Otani & Takuma Matsuda, 2023. "Unified Merger List in the Container Shipping Industry from 1966 to 2022: A Structural Estimation of M&A Matching," Papers 2310.09938, arXiv.org, revised Dec 2024.
    13. Marshall, Guillermo & Parra, Álvaro, 2019. "Innovation and competition: The role of the product market," International Journal of Industrial Organization, Elsevier, vol. 65(C), pages 221-247.
    14. Suguru Otani, 2021. "Estimating Endogenous Coalitional Mergers: Merger Costs and Assortativeness of Size and Specialization," Papers 2108.12744, arXiv.org, revised Mar 2023.
    15. Stöhr, Annika & Noskova, Victoriia & Kunz-Kaltenhäuser, Philipp & Gänßle, Sophia & Budzinski, Oliver, 2019. "Happily ever after? Vertical and horizontal mergers in the U.S. media industry," Ilmenau Economics Discussion Papers 126, Ilmenau University of Technology, Institute of Economics.
    16. Esmée Dijk & José Luis Moraga-González & Evgenia Motchenkova, 2023. "Start-up Acquisitions and the Entrant’s and Incumbent’s Innovation Portfolios," Tinbergen Institute Discussion Papers 23-047/VII, Tinbergen Institute.
    17. Mitsukuni Nishida & Nathan Yang, 2014. "Better Together? Retail Chain Performance Dynamics in Store Expansion Before and After Mergers," Working Papers 14-08, NET Institute.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ronald Goettler & Brett Gordon, 2014. "Competition and product innovation in dynamic oligopoly," Quantitative Marketing and Economics (QME), Springer, vol. 12(1), pages 1-42, March.
    2. Ben Mermelstein & Volker Nocke & Mark A. Satterthwaite & Michael D. Whinston, 2020. "Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy," Journal of Political Economy, University of Chicago Press, vol. 128(1), pages 301-341.
    3. Marshall, Guillermo & Parra, Álvaro, 2019. "Innovation and competition: The role of the product market," International Journal of Industrial Organization, Elsevier, vol. 65(C), pages 221-247.
    4. Haucap, Justus & Stiebale, Joel, 2023. "Non-price effects of mergers and acquisitions," DICE Discussion Papers 402, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    5. Haucap, Justus & Rasch, Alexander & Stiebale, Joel, 2019. "How mergers affect innovation: Theory and evidence," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 283-325.
    6. Calvano, Emilio & Polo, Michele, 2021. "Market power, competition and innovation in digital markets: A survey," Information Economics and Policy, Elsevier, vol. 54(C).
    7. Ulrich Doraszelski & Kenneth L. Judd, 2019. "Dynamic stochastic games with random moves," Quantitative Marketing and Economics (QME), Springer, vol. 17(1), pages 59-79, March.
    8. Ron N. Borkovsky, 2017. "The timing of version releases: A dynamic duopoly model," Quantitative Marketing and Economics (QME), Springer, vol. 15(3), pages 187-239, September.
    9. C. Lanier Benkard & Przemyslaw Jeziorski & Gabriel Y. Weintraub, 2015. "Oblivious equilibrium for concentrated industries," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 671-708, October.
    10. Linli Xu & Jorge M. Silva-Risso & Kenneth C. Wilbur, 2018. "Dynamic Quality Ladder Model Predictions in Nonrandom Holdout Samples," Management Science, INFORMS, vol. 64(7), pages 3187-3207, July.
    11. Narajabad, Borghan & Watson, Randal, 2011. "The dynamics of innovation and horizontal differentiation," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 825-842, June.
    12. Johannes Van Biesebroeck & Aamir Hashmi, 2007. "Market Structure and Innovation: A Dynamic Analysis of the Global Automobile Industry," 2007 Meeting Papers 362, Society for Economic Dynamics.
    13. Federico, Giulio & Langus, Gregor & Valletti, Tommaso, 2018. "Horizontal mergers and product innovation," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 1-23.
    14. Giulio Federico & Fiona Scott Morton & Carl Shapiro, 2020. "Antitrust and Innovation: Welcoming and Protecting Disruption," Innovation Policy and the Economy, University of Chicago Press, vol. 20(1), pages 125-190.
    15. Motta, Massimo & Tarantino, Emanuele, 2021. "The effect of horizontal mergers, when firms compete in prices and investments," International Journal of Industrial Organization, Elsevier, vol. 78(C).
    16. Igor Letina & Armin Schmutzler & Regina Seibel, 2024. "Killer Acquisitions And Beyond: Policy Effects On Innovation Strategies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 591-622, May.
    17. C. Lanier Benkard & Przemyslaw Jeziorski & Gabriel Y. Weintraub, 2013. "Oblivious Equilibrium for Concentrated Industries," NBER Working Papers 19307, National Bureau of Economic Research, Inc.
    18. Ron N. Borkovsky & Avi Goldfarb & Avery M. Haviv & Sridhar Moorthy, 2017. "Measuring and Understanding Brand Value in a Dynamic Model of Brand Management," Marketing Science, INFORMS, vol. 36(4), pages 471-499, July.
    19. FUKASAWA Takeshi & OHASHI Hiroshi, 2023. "Long-run Effect of a Horizontal Merger and Its Remedial Standards," Discussion papers 23001, Research Institute of Economy, Trade and Industry (RIETI).
    20. Bennato, Anna Rita & Davies, Stephen & Mariuzzo, Franco & Ormosi, Peter, 2021. "Mergers and innovation: Evidence from the hard disk drive market," International Journal of Industrial Organization, Elsevier, vol. 77(C).

    More about this item

    Keywords

    Mergers; Antitrust; innovation; dynamic oligopoly;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:90764. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.