R&D and Merger Profitability

Abstract

This paper analyzes the interaction between R&D and merger profitability. The industry is composed of symmetric firms who undertake cost-reducing R&D and compete in output. A subgroup of firms merge, and all firms adjust their R&D investments to the new market structure. It is found that in most cases R&D has a negligible impact on merger profitability, and does not change the critical number of firms required to make a merger profitable. However, when firms are indifferent toward a merger in the absence of R&D, R&D has an effect on merger profitability. Noncooperative R&D makes such mergers profitable for low and high levels of spillovers, and unprofitable for intermediate levels of spillovers; moreover, the range of spillovers such that a merger is unprofitable due to R&D increases with concentration. Cooperative R&D without information sharing makes such mergers profitable for low spillovers, but unprofitable for high spillovers. Cooperative R&D with information sharing makes such mergers unprofitable.