Abstract
We extend the classic model of Perry and Porter (1985) to allow for cost-reducing innovations and in this setting we analyse the competitive effects of horizontal mergers. The analysis focuses on the innovation-sharing mechanism, whereby the merging firms share the results of their research, enlarging the base of application of inventions and hence the incentive to innovate. We show that if marginal costs are increasing, the innovation-sharing mechanism may more than offset the contractionary output effect that operates for any given state of the technology, making horizontal mergers pro-competitive even in the absence of synergies in production and research.
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