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Merger and Innovation Incentives in a Differentiated Industry

Kesavayuth, Dusanee and Lee, Sang-Ho and Zikos, Vasileios (2017): Merger and Innovation Incentives in a Differentiated Industry. Forthcoming in: International Journal of the Economics of Business , Vol. 25, No. 2 (2018)

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Abstract

In this paper, we consider a duopoly with product differentiation and examine the interaction between merger and innovation incentives. The analysis reveals that a merger tends to discourage innovation, unless the investment cost is sufficiently low. This result holds whether or not side payments between firms are allowed. When side payments are permitted, a bilateral merger-to-monopoly is always profitable, a standard result in the literature. When side payments are not permitted, however, we show that a merger is not profitable when the efficiency of the new technology is relatively high and the investment cost is below a particular level.

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