Shelving or developing? The acquisition of potential competitors under financial constraints

Chiara Fumagalli, Massimo Motta and Emanuele Tarantino

No 680, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

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 startups lacking the financial resources to develop independently, and increases expected welfare. Keywords: Optimal merger policy, selection effect, nascent competitors. JEL Classification: L41, L13, K21

Date: 2022
New Economics Papers: this item is included in nep-com, nep-ent, nep-law and nep-mic
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Related works:
Working Paper: Shelving or Developing? The Acquisition of Potential Competitors under Financial Constraints (2022)
Working Paper: Shelving or Developing? The Acquisition of Potential Competitors under Financial Constraints (2020)
Working Paper: Shelving or developing? The acquisition of potential competitors under financial constraints (2020)
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