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M&A and Early Investment Decisions by Digital Platforms

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  • Zelda Brutti
  • Luis Rojas

Abstract

We propose an original theoretical framework that models early investment decisions of digital platform startups and use it to study how merger and acquisition policy affects consumer welfare by shaping such decisions. We formalize the investment options faced by digital platforms into a dual margin: investment in ‘customer engagement technology’, directed towards expanding the user base and in ‘intermediation technology’, directed towards lowering operational costs. Sinergies through technological transfer and increased investment incentives in customer engagement explain consumer welfare improvements in the case of M&As occurring between platforms with disjoint user bases. On the other hand, lower competition erodes consumer welfare in the case of allowing M&As between platforms with overlapping user bases. We conclude that M&A policy guidance should depend on the relationship between the incumbent’s and startup’s target users and on the ability of the startup to catch up with the incumbent.

Suggested Citation

  • Zelda Brutti & Luis Rojas, 2021. "M&A and Early Investment Decisions by Digital Platforms," Working Papers 1304, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1304
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    References listed on IDEAS

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    1. Wil Aalst & Oliver Hinz & Christof Weinhardt, 2019. "Big Digital Platforms," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 61(6), pages 645-648, December.
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    3. Gautier, Axel & Lamesch, Joe, 2021. "Mergers in the digital economy," Information Economics and Policy, Elsevier, vol. 54(C).
    4. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust," Working Papers 43276, Bruegel.
    5. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust [Ex-post assessment of merger control decisions in digital markets]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 30(5), pages 1307-1336.
    6. Elena Argentesi & Paolo Buccirossi & Emilio Calvano & Tomaso Duso & Alessia Marrazzo & Salvatore Nava, 2021. "Merger Policy in Digital Markets: An Ex Post Assessment†," Journal of Competition Law and Economics, Oxford University Press, vol. 17(1), pages 95-140.
    7. Kevin A. Bryan & Erik Hovenkamp, 2020. "Antitrust Limits on Startup Acquisitions," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(4), pages 615-636, June.
    8. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust," Working Papers 40796, Bruegel.
    9. Cabral, Luís, 2021. "Merger policy in digital industries," Information Economics and Policy, Elsevier, vol. 54(C).
    10. Hélia Costa & Giuseppe Nicoletti & Mauro Pisu & Christina von Rueden, 2021. "Are online platforms killing the offline star? Platform diffusion and the productivity of traditional firms," OECD Economics Department Working Papers 1682, OECD Publishing.
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    Cited by:

    1. Christian Fons-Rosen & Pau Roldan-Blanco & Tom Schmitz, 2022. "The Effects of Startup Acquisitions on Innovation and Economic Growth," Working Papers 944, Queen Mary University of London, School of Economics and Finance.
    2. Federico Boffa & Amedeo Piolatto & Evila Piva & Florian Schuett, 2022. "Industry dynamics in digital markets," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(3), pages 401-407, September.

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    More about this item

    Keywords

    digital platforms; mergers and acquisitions; investment;
    All these keywords.

    JEL classification:

    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing

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