Joint with Pietro Azzali (TSE) and Vincenzo Denicolò (U. Bologna)

Abstract:

The acquisition of innovative start-ups by incumbent firms is a prominent phenomenon in digital, pharmaceutical, and biotechnology markets. Because target firms are typically very small, these acquisitions often escape scrutiny by public authorities (stealth consolidation). Recent debate has raised questions about whether serial acquisitions of start-ups foster or hinder innovation.

We develop an infinite-horizon, discrete-time model in which, in each period, a start-up develops an innovative product,  and an incumbent firm competes to acquire it. We consider two cases: the innovative product is either a higher-quality substitute for the incumbent’s product, potentially challenging its dominant position, or a complement that can be incorporated into the incumbent’s product bundle, expanding its ecosystem.

We show that, in both cases, although through distinct mechanisms, serial acquisitions stimulate innovative effort in the short run (“innovation for buyout”) by enhancing the value of the now product, but slow the rate of innovation in the long run by reinforcing dominance (“monopoly entrenchment”), reducing the ability of the start-up to extract  a fraction of the product's value. Policies that prohibit acquisitions by the leading firm under certain conditions may therefore be desirable if policymakers are sufficiently forward-looking. Recent developments in US and EU merger regulation are consistent with these findings.

for information giorgia.bosco@unibocconi.it.