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Acquisitions, Entry and Innovation in Network Industries

Why do so many high-priced acquisitions of entrepreneurial firms take place in network industries? We develop a theory of commercialization (entry or sale) in network industries showing that high equilibrium acquisition prices are driven by the incumbents' desire to prevent rivals from acquiring innovative entrepreneurial firms. This preemptive motive becomes more important when there is an increase in network effects. A consequence is higher innovation incentives under an acquisition relative to entry. A policy enforcing strict compatibility leads to more entry, but can be counterproductive by reducing bidding competition, thereby also reducing acquisition prices and innovation incentives.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 867.

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Length: 38 pages
Date of creation: 06 Apr 2011
Date of revision:
Publication status: Published as Norbäck, Pehr-Johan, Lars Persson and Joacim Tåg, 'Acquisitions, Entry and Innovation in Network Industries' in International Journal of Industrial Organization, 2014, pages 1-12.
Handle: RePEc:hhs:iuiwop:0867
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  1. Norbäck, Pehr-Johan & Persson, Lars, 2009. "The Organization of the Innovation Industry: Entrepreneurs, Venture Capitalists and Oligopolists," Working Paper Series 783, Research Institute of Industrial Economics.
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