Jump to ContentJump to Main Navigation
Show Summary Details
In This Section

The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

4 Issues per year

IMPACT FACTOR 2016: 0.252
5-year IMPACT FACTOR: 0.755

CiteScore 2016: 0.48

SCImago Journal Rank (SJR) 2015: 0.501
Source Normalized Impact per Paper (SNIP) 2015: 0.418

See all formats and pricing
In This Section
Volume 13, Issue 2 (Aug 2013)


Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Horizontal Mergers, Firm Heterogeneity, and R&D Investments

Noriaki Matsushima
  • Corresponding author
  • Institute of Social and Economic Research, Osaka University, 6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan
  • Email:
/ Yasuhiro Sato
  • Graduate School of Economics, Osaka University, 1-31 Machikaneyama, Toyonaka, Osaka 560-0043, Japan
  • Email:
/ Kazuhiro Yamamoto
  • Graduate School of Economics, Osaka University, 1-31 Machikaneyama, Toyonaka, Osaka 560-0043, Japan
  • Email:
Published Online: 2013-08-24 | DOI: https://doi.org/10.1515/bejeap-2012-0058


We investigate the incentive and welfare implications of a merger when heterogeneous oligopolists compete both in process R&D and on the product market. We examine how a merger affects the output, investment, and profits of firms. In addition, we examine whether firms have merger incentives, and, if so, whether such mergers are desirable from the viewpoint of social welfare. If R&D is not expensive and if large cost differences between efficient and inefficient firms exist, a merger between homogeneous firms tends to occur even though it harms welfare.

Keywords: mergers; oligopoly; R&D; heterogeneity

JEL Classification: L41; L13; O32


  • Andrade, G., M. Mitchell, and E. Stafford. 2001. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives 15:103–20. [Web of Science] [Crossref]

  • Atallah, G. 2005. “R&D and Merger Profitability.” Seoul Journal of Economics 18:325–54. [Web of Science]

  • Barros, P. P. 1998. “Endogenous Mergers and Size Asymmetry of Merger Participants.” Economics Letters 60:113–19. [Crossref]

  • Barros, P. P., and T. Nilssen. 1999. “Industrial Policy and Firm Heterogeneity.” Scandinavian Journal of Economics 101:597–616. [Crossref]

  • Bartolini, D. 2011. “Investment and Merging as an Endogenous Coalition Formation Game.” Essex Discussion Paper No. 628.

  • Bertrand, O., K. Nilsson, P.-J. Norbäck, and L. Persson. 2012. “Should Countries Block Foreign Takeovers of R&D Champions and Promote Greenfield Entry?” Canadian Journal of Economics 45:1083–124. [Crossref] [Web of Science]

  • Burgelman, R. A. 1983. “A Process Model of Internal Corporate Venturing in the Diversified Major Firm.” Administrative Science Quarterly 28:223–44. [Crossref]

  • Capron, L. 1999. “The Long-Term Performance of Horizontal Acquisitions.” Strategic Management Journal 20:987–1018. [Crossref]

  • Cassiman, B., M. G. Colombo, P. Garrone, and R. Veugelers. 2005. “The Impact of M&A on the R&D Process: An Empirical Analysis of the Role of Technological- and Market-Relatedness.” Research Policy 34:195–220. [Crossref]

  • Davidson, C., and B. Ferret. 2007. “Mergers in Multidimensional Competition.” Economica 74:695–712. [Crossref]

  • de Man, A.-P., and G. Duysters. 2005. “Collaboration and Innovation: A Review of the Effects of Mergers, Acquisitions, and Alliances on Innovation.” Technovation 25:1377–87. [Crossref]

  • Farrell, J., and C. Shapiro. 1990. “Horizontal Mergers: An Equilibrium Analysis.” American Economic Review 80:107–26.

  • Ferrett, B., and J. Poyago-Theotoky. 2012. “Horizontal Agreements and R&D Complementarities: Merger versus RJV.” Working Paper Series in Rimini Centre for Economic Analysis 13_12.

  • Friberg, R., P.-J. Norbäck, and L. Persson. 2012. “Ex Post Merger Evaluations and Strategic Pre-merger Investments.” Journal of Competition Law & Economics 8:831–48. [Crossref] [Web of Science]

  • Fumagalli, E., and H. Vasconcelos. 2009. “Sequential Cross-Border Mergers.” International Journal of Industrial Organization 27:175–87. [Web of Science] [Crossref]

  • Harrison, T. D. 2011. “Do Mergers Really Reduce Costs? Evidence from Hospitals.” Economic Inquiry 49:1054–69. [Crossref] [PubMed] [Web of Science]

  • Heywood, J. S., and M. McGinty. 2007. “Convex Costs and the Merger Paradox Revisited.” Economic Inquiry 45:342–9. [Crossref]

  • Heywood, J. S., and M. McGinty. 2008. “Leading and Merging: Convex Costs, Stackelberg and the Merger Paradox.” Southern Economic Journal 74:879–93. [Web of Science]

  • Horn, H., and L. Persson. 2000. “Endogenous Mergers in Concentrated Markets.” International Journal of Industrial Organization 19:1213–44. [Web of Science]

  • Horn, H., and L. Persson. 2001. “The Equilibrium Ownership of an International Oligopoly.” Journal of International Economics 53:307–33. [Crossref]

  • Huck, S., and K. A. Konrad. 2004. “Merger Profitability and Trade Policy.” Scandinavian Journal of Economics 106:107–22. [Crossref]

  • Ishida, J., T. Matsumura, and N. Matsushima. 2011. “Market Competition, R&D and Firm Profits in Asymmetric Oligopoly.” Journal of Industrial Economics 59:484–505. [Web of Science] [Crossref]

  • Jensen, M. C., and R. S. Ruback. 1983. “The Market for Corporate Control: The Scientific Evidence.” Journal of Financial Economics 11:5–50. [Crossref]

  • Jost, P.-J., and C. van der Velden. 2008. “Organizational Design of R&D After Mergers and the Role of Budget Responsibility.” Journal of Economics and Business 60:469–84. [Crossref]

  • Kabiraj, T., and A. Mukherjee. 2000. “Cooperation in R&D and Production: A Three-Firm Analysis.” Journal of Economics 71:281–304. [Crossref]

  • Lahiri, S., and Y. Ono. 1988. “Helping Minor Firms Reduces Welfare.” Economic Journal 98:1199–202. [Crossref]

  • Larsson, R., and S. Finkelstein. 1999. “Integrating Strategic, Organizational, and Human Resource Perspectives on Mergers and Acquisitions: A Case Survey of Synergy Realization.” Organization Science 10:1–26. [Crossref]

  • Lommerud, K. E., O. R. Straume, and L. Sørgard. 2006. “National versus International Mergers in Unionized Oligopoly.” RAND Journal of Economics 37:212–33. [Crossref]

  • Matsushima, N. 2001. “Horizontal Mergers and Merger Waves in a Location Model.” Australian Economic Papers 40:263–86. [Crossref]

  • Mukherjee, A. 2006. “Cross-Border Merger and Domestic Welfare.” Economics Bulletin 6(18):1–8.

  • Perry, M., and R. Porter. 1985. “Oligopoly and the Incentive for Horizontal Merger.” American Economic Review 75:219–27.

  • Phillips, G. M., and A. Zhdanov. 2013. “R&D and the Incentives from Merger and Acquisition Activity.” Review of Financial Studies 26:34–78. [Web of Science] [Crossref]

  • Qiu, L. D., and W. Zhou. 2006. “International Mergers: Incentives and Welfare.” Journal of International Economics 68:38–58. [Crossref]

  • Röller, L.-H., J. Stennek, and F. Verboven. 2006. “Efficiency Gains from Merger.” In European Merger Control: Do We Need an Efficiency Defence? edited by F. Ilzkovitz and R. Meiklejohn, 84–201. Cambridge, MA: Edward Elgar.

  • Salant, S., S. Switzer, and R. Reynolds. 1983. “Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot–Nash Equilibrium.” Quarterly Journal of Economics 98:185–99. [Crossref]

  • Sinha, U. B. 2006. “On R&D Information Sharing and Merger.” mimeo.

  • Stenbacka, L. R. 1991. “Mergers and Investments in Cost Reduction with Private Information.” International Journal of Industrial Organization 9:397–405. [Crossref]

  • Tremblay, V. J., and C. H. Tremblay. 1988. “The Determinants of Horizontal Acquisitions: Evidence from the US Brewing Industries.” Journal of Industrial Economics 37:21–45. [Crossref]

  • Zhao, X. 2009. “Technological Innovation and Acquisitions.” Management Science 55:1170–83. [Crossref] [Web of Science]

  • Ziss, S. 1994. “Strategic R&D with Spillovers, Collusion and Welfare.” Journal of Industrial Economics 42:375–93. [Crossref]

About the article

Published Online: 2013-08-24

Capron (1999) pointed out the significant risk of damaging acquisition performance when the divested assets and redeployed resources are those of the target.

Perry and Porter (1985) investigated the impact of a horizontal merger that causes a cost reduction through aggregating the capital of the merging firms. Fumagalli and Vasconcelos (2009) extended this to the discussion of international mergers. Those articles cannot investigate how a horizontal merger changes the strategic interaction of efforts on cost-reducing activities. Farrell and Shapiro (1990) comprehensively investigated the effect of the change in the output through a horizontal merger. One of our main concerns is how firms execute horizontal mergers under Cournot competition with R&D although the properties in Farrell and Shapiro (1990) are shared with those in our article.

Ziss (1994) discussed a merger under a duopoly case in which two firms engage in R&D with spillover. Kabiraj and Mukherjee (2000) considered the case in which two firms with the same ex ante marginal cost engage in R&D and then decide whether to merge given the outcome of R&D is determined. Mukherjee (2006) discussed the effect of cross-border mergers on R&D and welfare. Jost and van der Velden (2008) also discussed the effect of horizontal mergers when firms engage in R&D investments for a patent race with spillover.

Friberg, Norbäck, and Persson (2012) and Phillips and Zhdanov (2013) captured the bidding behavior of firms in an acquisition process after firms engage in R&D. These articles mainly focus on the strategic aspect of premerger R&D. We discuss the relationship between those articles and ours in Section 4.

Sinha (2006) also discussed the effect of horizontal mergers when the outcome of R&D can be private information. Atallah (2005) analyzed merger profitability in the case of cost-reducing R&D. In his numerical example, however, R&D investment does not provide incentives for mergers in most cases.

This type of cost heterogeneity is also used in Barros and Nilssen (1999) and Ishida, Matsumura, and Matsushima (2011).

We do not consider heterogeneity of R&D investment costs; that is, is common to all firms. Although incorporating this matter would be important, it complicates the analysis in this article. Moreover, we guess that this type of heterogeneity would have a similar effect on the incentive to merge as ex ante cost heterogeneity.

Throughout the article, we study the pairwise mergers, which means that mergers consist of two firms.

This criterion is consistent with the equilibrium concept of the core (see Horn and Persson 2000, 2001). In fact, when the firms are homogeneous, an allocation involving a merger that satisfies this criterion is in the core under the restriction of a pairwise merger. In the next section, where we introduce firm heterogeneity, we use the core as an equilibrium concept and provide an analysis of the equilibrium.

A change in the market share due to a pairwise merger is given by

which is greater for a smaller number of firms.

See Davidson and Ferrett (2007), Lommerud, Straume, and Sørgard (2006), and Qiu and Zhou (2006) for recent examples.

See Horn and Persson (2001) for a detailed discussion on these points.

Incorporating convex cost functions into quantity competition models, Heywood and McGinty (2007, 2008) reconsidered the problem of the “merger paradox.”

Although the discussion is not reported in this article, the result is available upon request.

They show that the strategic trade policy induces the domestic firms’ merger, because a domestic merger induces government to give subsidies to the merged domestic firm.

Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2012-0058. Export Citation

Comments (0)

Please log in or register to comment.
Log in