This paper examines how horizontal mergers affect firms’ incentives to invest in R&D leading to the development of new products. We characterize the impact of a merger to monopoly and a 3-to-2 merger on equilibrium innovation efforts and consumer surplus, absent efficiency gains and spillovers. We show that a 3-to-2 merger directly alters the outsider’s innovation incentives by shifting its best-response function upward, and we analyze how this mechanism affects merger outcomes for innovation and consumer surplus. Finally, we examine how efficiency gains and remedies modify post-merger innovation efforts.
Mergers and Investments in New Products
Leonardo Madio
2026
Abstract
This paper examines how horizontal mergers affect firms’ incentives to invest in R&D leading to the development of new products. We characterize the impact of a merger to monopoly and a 3-to-2 merger on equilibrium innovation efforts and consumer surplus, absent efficiency gains and spillovers. We show that a 3-to-2 merger directly alters the outsider’s innovation incentives by shifting its best-response function upward, and we analyze how this mechanism affects merger outcomes for innovation and consumer surplus. Finally, we examine how efficiency gains and remedies modify post-merger innovation efforts.
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