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

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  • Chiara Fumagalli
  • Massimo Motta
  • Emanuele Tarantino

Abstract

A start-up and an incumbent negotiate over an acquisition price under asymmetric information about the start-up’s ability to succeed in the market. The acquisition may result in the shelving of the start-up’s project or the development of a project that would otherwise never reach the market because of financial constraints. Despite this possible pro-competitive effect, the optimal merger policy commits to standards of review that prohibit high-price takeovers, even if they may be welfare-beneficial ex post. Ex ante this pushes the incumbent to acquire startups lacking the financial resources to develop independently, and increases expected welfare. Keywords: Optimal merger policy, selection effect, nascent competitors. JEL Classification: L41, L13, K21

Suggested Citation

  • Chiara Fumagalli & Massimo Motta & Emanuele Tarantino, 2022. "Shelving or developing? The acquisition of potential competitors under financial constraints," Working Papers 680, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:680
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    Citations

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    Cited by:

    1. Vaziri, M., 2022. "Antitrust Law and Business Dynamism," Cambridge Working Papers in Economics 2243, Faculty of Economics, University of Cambridge.
    2. Igor Letina & Armin Schmutzler & Regina Seibel, 2024. "Killer Acquisitions And Beyond: Policy Effects On Innovation Strategies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 591-622, May.
    3. Gilbert, Richard J. & Katz, Michael L., 2022. "Dynamic merger policy and pre-merger product choice by an entrant," International Journal of Industrial Organization, Elsevier, vol. 81(C).
    4. Jean-Michel Benkert & Igor Letina & Shuo Liu, 2023. "Startup Acquisitions: Acquihires and Talent Hoarding," Papers 2308.10046, arXiv.org, revised Jul 2024.
    5. Jean-Michel Benkert, Igor Letina, Shuo Liu, 2023. "Startup Acquisitions: Acquihires and Talent Hoarding," Diskussionsschriften dp2309, Universitaet Bern, Departement Volkswirtschaft.
    6. Klaus Gugler & Florian Szücs & Ulrich Wohak, 2023. "Start-up Acquisitions, Venture Capital and Innovation: A Comparative Study of Google, Apple, Facebook, Amazon and Microsoft," Department of Economics Working Papers wuwp340, Vienna University of Economics and Business, Department of Economics.
    7. Brunner, Philipp & Letina, Igor & Schmutzler, Armin, 2024. "Research joint ventures: The role of financial constraints," European Economic Review, Elsevier, vol. 165(C).
    8. Haucap, Justus & Stiebale, Joel, 2023. "Non-price effects of mergers and acquisitions," DICE Discussion Papers 402, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    9. Lefouili, Yassine & Madio, Leonardo, 2023. "Market Structure and Investments : A Progress Report," TSE Working Papers 23-1491, Toulouse School of Economics (TSE), revised Sep 2024.
    10. Pauline Affeldt & Reinhold Kesler, 2021. "Competitors’ Reactions to Big Tech Acquisitions: Evidence from Mobile Apps," Discussion Papers of DIW Berlin 1987, DIW Berlin, German Institute for Economic Research.
    11. Motta, Massimo & Peitz, Martin, 2021. "Big tech mergers," Information Economics and Policy, Elsevier, vol. 54(C).
    12. 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.
    13. Esmée Dijk & José Luis Moraga-González & Evgenia Motchenkova, 2023. "Start-up Acquisitions and the Entrant’s and Incumbent’s Innovation Portfolios," Tinbergen Institute Discussion Papers 23-047/VII, Tinbergen Institute.
    14. 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.
    15. Lancieri, Filippo Maria & Valleti, Tommaso, 2024. "Towards an effective merger review policy: A defence of rebuttable structural presumptions," Working Papers 345, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    16. Laureen de Barsy & Axel Gautier, 2024. "Big Tech Acquisitions and Innovation: An Empirical Assessment," CESifo Working Paper Series 11025, CESifo.
    17. Iñigo Herguera, 2021. "Competencia y regulación de (algunas) plataformas digitales en la UE," Working Papers 2021-10, FEDEA.
    18. Prado, Tiago S. & Bauer, Johannes M., 2022. "Big Tech platform acquisitions of start-ups and venture capital funding for innovation," Information Economics and Policy, Elsevier, vol. 59(C).
    19. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust," Working Papers 43276, Bruegel.

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    More about this item

    Keywords

    optimal merger policy; selection effect; nascent competitors. jel classification: l41; l13; k21;
    All these keywords.

    JEL classification:

    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law

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