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

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Abstract

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.

Suggested Citation

  • Chiara Fumagalli & Massimo Motta & Emanuele Tarantino, 2020. "Shelving or developing? The acquisition of potential competitors under financial constraints," Economics Working Papers 1735, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:1735
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    References listed on IDEAS

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    1. Igor Letina & Armin Schmutzler & Regina Seibel, 2020. "Start-up acquisitions and innovation strategies," Diskussionsschriften dp2003, Universitaet Bern, Departement Volkswirtschaft.
    2. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    3. Vojislav Maksimovic & Gordon Phillips, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, vol. 56(6), pages 2019-2065, December.
    4. Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
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    Cited by:

    1. Motta, Massimo & Peitz, Martin, 2020. "Big Tech Mergers," CEPR Discussion Papers 14353, C.E.P.R. Discussion Papers.
    2. Letina, Igor & Schmutzler, Armin & Seibel, Regina, 2020. "Killer Acquisitions and Beyond: Policy Effects on Innovation Strategies," CEPR Discussion Papers 15167, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    merger policy; digital markets; potential competition; conglomerate mergers;
    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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