Brattle academic advisor Joshua Gans recently published “Mergers and Disruptive Innovation” in the Autumn 2015 edition of Hogan Lovells’ Global Media and Communications Quarterly.
Although mergers have often been viewed as impeding innovation by reducing competitive pressure, Professor Gans discusses conditions under which mergers may improve welfare. In an environment where “disruptive innovation” can dramatically change the competitive landscape, innovation can make a company more attractive for a merger. Thus, blocking all mergers would effectively depress the incentive to innovate. In other words, while mergers may lead to static anticompetitive effects such as higher prices, they can also spur innovation and yield dynamic procompetitive effects.
Professor Gans explains that empirical analysis is required to determine whether the net effect is harmful or beneficial to consumers, highlighting a recent working paper by Igami and Uetake that investigates this issue in the hard disk drive (“HDD”) industry. This study demonstrates that although HDD mergers reduced the number of competitors from 5 to 3, the pro-competitive effects dominated. Had the industry remained at 5 competitors, social welfare would have been lower because of reduced spending on R&D and innovation.
Professor Gans emphasizes the importance of examining dynamic implications of merger policy. By itself, market concentration provides insufficient information to evaluate the welfare implications of a merger. Instead, to determine the extent to which the market is competitive, the reduction in competitive pressure should be weighed against gains from increased innovation.
The full article can be read here.