Shelving or developing? The acquisition of potential competitors under financial constraints

We analyse the optimal policy of an antitrust authority towards the acquisitions of potential competitors in a model with financial constraints. With respect to traditional mergers, these acquisitions trigger a new trade-off. On the one hand, the acquirer may decide to shelve the project of the potential entrant. On the other hand, the acquisition may allow for the development of a project that would otherwise never reach the market. We first show that a merger policy does not need to be lenient towards acquisitions of potential competitors to take advantage of their pro-competitive effects on project development. This purpose is achieved by a policy that pushes the incumbent towards the acquisition of the potential entrants that lack the financial resources to develop the project. To this end, the implementation of this policy can be contingent to the bid formulated by the acquirer. However, we also show that, if the anticipation of a takeover relaxes the target firm's financial constraints, a more lenient merger policy, which allows for the acquisition of firms that have already committed to enter the market, may be optimal.