M&A and early investment decisions by digital platforms

Zelda Brutti () and Luis Rojas
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Zelda Brutti: Universitat Pompeu Fabra

Economia e Politica Industriale: Journal of Industrial and Business Economics, 2022, vol. 49, issue 3, No 5, 509-543

Abstract: 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. Synergies 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: M&A; Digital platforms; Platform competition; Consumer welfare (search for similar items in EconPapers)
JEL-codes: L25 L40 L81 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s40812-022-00223-3

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