Abstract
We set up a stylized oligopoly model of uncertain product to analyze the effects of a merger on incentives and on consumer surplus. The model incorporates two competitive channels for merger effects: the channel and the internalization of the innovation externality. We solve the model numerically and find that price coordination between the two products of the merged firm tends to stimulate innovation, while internalization of the externality depresses it. The latter effect is stronger in our simulations and, as a result, the merger leads to lower incentives for the merged entity, absent cost efficiencies and knowledge spillovers. In our numerical analysis both overall and consumer welfare fall after a merger.
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