Discussion paper

DP15113 Shelving or developing? The acquisition of potential competitors under financial constraints.

A start-up and an incumbent negotiate over an acquisition price under asymmetric information about the start-up's ability to succeed in the market. The acquisition may result in the shelving of the start-up's project or the development of a project that would otherwise never reach the market because of financial constraints. Despite this possible pro-competitive effect, the optimal merger policy commits to standards of review that prohibit high-price takeovers, even if they may be welfare-beneficial ex post. Ex ante this pushes the incumbent to acquire start-ups lacking the financial resources to develop independently, and increases expected welfare.

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Citation

Fumagalli, C, M Motta and E Tarantino (eds) (2022), “DP15113 Shelving or developing? The acquisition of potential competitors under financial constraints.”, CEPR Press Discussion Paper No. 15113. https://cepr.org/publications/dp15113