DP16826 Acquisitions, innovation, and the entrenchment of monopoly

Author(s): Vincenzo Denicolò, Michele Polo
Publication Date: December 2021
Keyword(s): Acquisitions, Antitrust Policy, Innovation, market power
JEL(s): L10, L40
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16826

We analyze a dynamic model of repeated innovation where inventors may be acquired by an incumbent or else challenge its leadership. In the short run, acquisitions always spur innovation because of the invention-for-buyout effect. In the long-run, however, acquisitions may stifle innovation because of a countervailing effect, the entrenchment of monopoly. The entrenchment-of-monopoly effect arises when the incumbent's dominance depends on its past activity levels and thus is reinforced by repeated acquisitions over time. We show that if the entrenchment-of-monopoly effect is sufficiently strong, forward-looking policymakers should prohibit acquisitions in the anticipation of their long-run negative impact on innovation. This argument provides a new theory of harm that can be used to block acquisitions that might otherwise go unchallenged.