Mergers and innovation portfolios

This article studies mergers in markets where firms invest in a portfolio of research projects of different profitability and social value. The investment of a firm in one project imposes both a negative business-stealing and a positive business-giving externality on the rival firms. We show that when the project that is relatively more profitable for the firms appropriates a larger (smaller) fraction of the social surplus, a merger increases (decreases) consumer welfare by reducing investment in the most profitable project and increasing investment in the alternative project. The innovation portfolio effects of mergers may dominate the usual market power effects.