Faulí-Oller, R., J. Sandonís and J. Santamaría
The Manchester School – 79.4 (2011): 884-898.
Keywords: mergers, investment, upstream, downstream
Abstract: In this paper, we show that downstream mergers increase the incentives of an upstream firm to invest in cost-reducing R&D. The upstream firm revenues increase with industry profits, which in turn increase with concentration downstream and this explains the positive link between concentration and investment. This effect is so important that it outweighs the negative effect on prices because of lower competition. Therefore, in our context, horizontal mergers are pro-competitive. Furthermore, downstream firms find profitable to merge: monopolization is the outcome of a standard merger game even for very unconcentrated industries.