We thank Stephane Caprice, George Deltas, Emmanuel Petrakis, Patrick Rey, Nikolaos Vettas, the co-editor, and two anonymous referees for their useful comments and suggestions. We also thank seminar participants at the Toulouse School of Economics, the Athens University of Economics and Business, and the CERGE-EI (Prague), as well as conference participants at the 7th International Industrial Organization Conference at Boston, the 8th Conference on Research on Economic Theory and Econometrics at Tinos, and the ASSET 2009 conference at Istanbul. This is a substantially revised version of the previously circulated “Upstream Horizontal Mergers and Efficiency Gains,” CESifo Working Paper 2748. This research has been cofinanced by the European Union (European Social Fund—ESF) and Greek national funds through the Operational Program “Education and Lifelong Learning” of the National Strategic Reference Framework (NSRF)—Research Funding Program: Heracleitus II—Investing in knowledge society through the European Social Fund. Full responsibility for all shortcomings is ours.
Upstream Mergers, Downstream Competition, and R&D Investments
Article first published online: 18 OCT 2013
© 2013 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy
Volume 22, Issue 4, pages 787–809, Winter 2013
How to Cite
Milliou, C. and Pavlou, A. (2013), Upstream Mergers, Downstream Competition, and R&D Investments. Journal of Economics & Management Strategy, 22: 787–809. doi: 10.1111/jems.12034
- Issue published online: 18 OCT 2013
- Article first published online: 18 OCT 2013
- European Social Fund—ESF
- Greek national funds
In this paper, we provide an explanation for why upstream firms merge, highlighting the role of R&D investments and their nature, as well as the role of downstream competition. We show that an upstream merger generates two distinct efficiency gains when downstream competition is not too strong and R&D investments are sufficiently generic: The merger increases R&D investments and decreases wholesale prices. We also show that upstream firms merge unless R&D investments are too specific and downstream competition is neither too weak nor too strong. When the merger materializes, the merger-generated efficiencies pass on to consumers, and thus, consumers can be better off.