Shelving or developing? Optimal policy for mergers with potential competitors

Chiara Fumagalli, Massimo Motta () and Emanuele Tarantino

No 15113, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Optimal merger policy; Selection effect; Nascent competitors (search for similar items in EconPapers)
JEL-codes: K21 L13 L41 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-com, nep-fdg, nep-ind, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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