Innovation and social desirability of merger

Although regulatory authorities are putting more emphasis to the long-run effects of mergers and acquisitions due to their effects on innovation, several merger proposals have been challenged due to their adverse innovation effects. In a simple model with endogenous "i'4D investment we show that the effects of merger on the R&D investment. consumer surplus and social welfare depend on the degree of knowledge spillover and the slope of the marginal cost of doing R&D. Hence, the social desirability of merger may depend on the effectiveness of the patent system and the cost of innovation.