Abstract

We study the effect of a merger on R&D activity in a dynamic model in which there is uncertainty about the feasibility of innovation. The merger has three effects on innovation. Once an innovation has already taken place, the merger may reduce the number of follow-up innovations (cannibalization effect). At the same time, the merger may increase the probability of the first game-changer innovation (appropriability effect) and bring this innovation forward in time - informational effect. A surprising policy implication of our model is that the benefit of the merger may be higher if the first and subsequent innovations are closer substitutes.