Mergers and Innovation Patrick Rey Association of Competition Economics Madrid – November 17, 2017

Impact of a merger on innovation Two channels Innovation rivalry Product competition Old literature: cooperation on R&D and prices Three (four) recent papers Motta and Tarantino: cost-reducing investment Bourreau and Jullien: demand-expansion investment Federico, Langus and Valletti (2): uncertain innovation (R&D) Patrick Rey Mergers and Innovation

Mergers and Innovation Recent papers Common effect No-synergy merger raises prices & profits / reduces outputs This, in turn, affect investment incentives Reduces cost-reduction investment: scale effect (elegant framework and fairly general treatment) Fosters demand-expansion investment: profitability effect (specific model – network infrastructure ; existence result) Reduces innovation: cannibalization (several classes of models and numerical simulations) Patrick Rey Mergers and Innovation

Mergers and Innovation R&D spillovers Empirical relevance: Bloom et al. (Econometrica 2013) Identify two types of “spillover” effects on firms’ performance: technology (or knowledge) spillovers (positive) product market rivalry effect of R&D (negative) Using firms’ positions in technology and product markets: technology spillovers dominate social value of R&D is twice as large as its private value Patrick Rey Mergers and Innovation

Mergers and Innovation R&D spillovers Merger control Motta and Tarantino, Federico-Langus and Valletti recognized as efficiency relation to appropriability (patents; other?) Mechanism: internalization of a positive externality similar to pricing and innovation externalities pricing externality: horizontal mergers raise prices innovation externality: key driver in Federico et al. Burden of proof? [Current state of efficiency defence] Patrick Rey Mergers and Innovation