M&A and Early Investment Decisions by Digital Platforms

Zelda Brutti and Luis E. Rojas
Authors registered in the RePEc Author Service: Luis Rojas and Luis Eduardo Rojas Dueñas

No 1304, Working Papers from Barcelona School of Economics

Abstract: We propose an original theoretical framework that models early investment decisions of digital platform startups and use it to study how merger and acquisition policy affects consumer welfare by shaping such decisions. We formalize the investment options faced by digital platforms into a dual margin: investment in 'customer engagement technology', directed towards expanding the user base and in 'intermediation technology', directed towards lowering operational costs. Sinergies through technological transfer and increased investment incentives in customer engagement explain consumer welfare improvements in the case of M&As occurring between platforms with disjoint user bases. On the other hand, lower competition erodes consumer welfare in the case of allowing M&As between platforms with overlapping user bases. We conclude that M&A policy guidance should depend on the relationship between the incumbent's and startup's target users and on the ability of the startup to catch up with the incumbent.

Keywords: investment; digital platforms; mergers and acquisitions (search for similar items in EconPapers)
JEL-codes: D25 L4 L81 O3 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-com, nep-mic, nep-pay and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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