DP16151 The "kill zone": Copying, acquisition and start-ups' direction of innovation

Author(s): Massimo Motta, Sandro Shelegia
Publication Date: May 2021
Date Revised: May 2021
Keyword(s): Copying, Innovation, platforms
JEL(s): L12, L41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16151

An incumbent monopolist may prevent a firm which currently sells a complementary product from developing a substitute, by copying its product. Imitation reduces the potential rival's current profits, making it less likely for it to obtain funding in the financial market. The anticipation of the incumbent's aggressive behaviour may also create an "ex ante" effect, by inducing the rival not to challenge the incumbent with a substitute (that is, not to enter the "kill zone") and develop another complement instead. Further, in this case the incumbent will have an incentive not to copy, since a new complement will raise its rents. The possibility of being acquired by the incumbent tends to push the rival towards developing a substitute rather than a complement. By choosing the former, potential gains from the acquisition are created (in the form of suppression of competition): as long as the rival has some bargaining power in the determination of the takeover price, it will then benefit from entering the "kill zone".