Mergers in Patent Contest Models with Synergies and Spillovers

We consider mergers in an innovation contest between n firms in the presence of synergetic effects. We assume that a merger may affect the R&D efficiency of the merging firm due to increasing returns to scale in R&D. We show that mergers are beneficial for the merging firms even if the efficiency gains of the merging firms are not substantial, and that merging reduces R&D costs by only 6%. We also consider the influence of unintended knowledge flows in R&D. In the presence of knowledge spillovers, we show that higher efficiency gains are needed to make the merger profitable