 Gaming the Giants: How Startups Shape Innovation to Spark Acquisition WarsOzlem Bedre Defolie, Gary Biglaiser and Bruno Jullien No 21361, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: We study a startup’s choice of its "direction of innovation," how well the technology fits alternative acquirers, and the effects on acquisition outcomes and market dominance. Two horizontally differentiated firms bid to acquire the innovation and then compete in the product market. Firms differ in initial quality stock and in "absorption capabilities," how effectively the acquired innovation is integrated into their stock. The innovator designs the innovation to intensify bidding by putting firms on a more equal footing, thereby favoring the initially lower-quality firm. As a result, "increasing dominance" is less likely than under exogenous fit. The winner of the innovation is driven primarily by relative absorption capabilities rather than initial quality: the firm with higher absorption capability is more likely to win. The equilibrium innovation direction minimizes industry profit and consumer surplus. In a two-period model, decreasing dominance becomes more likely when the low-quality firm has stronger absorption capabilities. Keywords: Startup Acquisitions; Direction of Innovation; Decreasing Dominance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21361 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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