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We study the effect of a merger on R&D activity in a dynamic
model with uncertainty about the feasibility of innovation. The
merger has three effects: it may reduce the number of follow-up
innovations (cannibalization effect), increase the probability of the
first game-changer innovation (appropriability effect), and bring
this innovation forward in time (informational effect). The model
suggests mergers are more desirable when R&D outcomes are
highly uncertain, but less so when the innovation path is clearer.
A surprising policy implication is that the benefit of the merger
may be higher if the first and subsequent innovations are closer
substitutes.
