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|
|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.