DP20156 Merger Policy for Platforms: A Growth Theory Perspective
Should Big Tech firms be allowed to acquire other firms? We address this question by developing a model of platform-based consumption. The platform supplies some of the products in the economy and startups supply the rest. The platform shares only part of its appeal with startups (``tying"), balancing the incentive to increase sales of its own products against the desire to attract consumers to the platform. The chance to be acquired by the platform provides a motive for startup entry. But acquisitions also expand the platform's product offerings, increase tying, and lower the profits of non-acquired startups which are the other motive for entry. Theoretically, an acquisition ban reduces growth in the short run but may increase it in the long run. Calibrating the model to data on U.S. households' time use on digital platforms suggests very minor welfare gains from an acquisition ban.
