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Horizontal Mergers, Firm Heterogeneity, and R&D Investments

Abstract We investigate the incentive and welfare implications of a merger when heterogeneous oligopolists compete both in process R&D and on the product market. We examine how a merger affects the output, investment, and profits of firms. In addition, we examine whether firms have merger incentives, and, if so, whether such mergers are desirable from the viewpoint of social welfare. If R&D is not expensive and if large cost differences between efficient and inefficient firms exist, a merger between homogeneous firms tends to occur even though it harms welfare.