DP15167 Killer Acquisitions and Beyond: Policy Effects on Innovation Strategies

Author(s): Igor Letina, Armin Schmutzler, Regina Seibel
Publication Date: August 2020
Date Revised: October 2021
Keyword(s): Innovation, killer acquisitions, Merger Policy, Potential competition, start-ups
JEL(s): G34, L41, O31
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15167

This paper provides a theory of strategic innovation project choice by incumbents and start-ups which serves as a foundation for the analysis of acquisition policy. We show that prohibiting acquisitions has a weakly negative innovation effect. We provide conditions determining the size of the effect and, in particular, conditions under which it is zero. We further analyze the effects of less restrictive policies, including merger remedies and the tax treatment of acquisitions and initial public offerings. Such interventions tend to prevent acquisitions only if the entrant has sufficiently high stand-alone profits.