Raising Rival's Quality Cost: Exclusive technology and innovation incentives

We study vertical acquisitions of technologies that reduce the cost of quality provision. Two firms compete to acquire the technology before choosing quality and prices. Exclusive acquisition is the unique equilibrium. Foreclosure lowers the rival’s quality and net utility, while the acquirer raises quality and price. When competition is strong, the acquirer’s quality increase can exceed its price increase, potentially benefiting consumers; when competition is weak, all consumers are harmed. Demand asymmetry strengthens the larger firm’s incentive to acquire and exploit the technology. Selective bans on dominant-firm acquisitions can reduce consumer surplus and welfare relative to laissez-faire or full prohibition.