Discussion paper

DP16826 Acquisitions, innovation, and the entrenchment of monopoly

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.


Denicolo, V and M Polo (2021), ‘DP16826 Acquisitions, innovation, and the entrenchment of monopoly‘, CEPR Discussion Paper No. 16826. CEPR Press, Paris & London. https://cepr.org/publications/dp16826