Theoretical analysis reveals how R&D alters merger incentives between public and private firms, indicating that price competition expands mutually beneficial merger conditions.
This paper studies how cost-reducing R&D affects firms’ merger decisions in a mixed duopoly. Conditional on four alternative R&D-participation regimes, we derive equilibrium investment levels and the ownership-share thresholds governing each firm’s acceptance of a merger. We find that (1) when both firms undertake R&D and product differentiation is relatively high, both firms may prefer a merger for an intermediate range of government ownership; (2) relative to the no-R&D regime, R&D weakens the public firm’s merger incentive but may strengthen the private firm’s incentive when product differentiation is relatively low; and (3) under R&D, the region in which both firms prefer a merger is larger under price competition than under quantity competition.
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Yang et al. (2026) studied this question.
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