Kill Zone

Luigi Zingales, Sai Krishna Kamepalli and Raghuram Rajan

No 14709, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study why acquisitions of entrant firms by an incumbent can deter innovation and entry in the digital platform industry, where there are strong network externalities and some customers face switching costs. A high probability of an acquisition induces some potential early adopters to wait for the entrant's product to be integrated into the incumbent's product instead of switching to the entrant. Because of this, the incumbent is able to acquire the entrant for a lower price. Even if the incumbent platform does not undertake any traditional anti-competitive action, the reduction in prospective payoffs to entrants creates a “kill zone†in the space of startups, as described by venture capitalists, where entry is hard to finance. The drop-off in venture capital investment in startups in sectors where Facebook and Google make major acquisitions suggests this is more than just a theoretical possibility.

Keywords: Digital platforms; Acquisitions; Kill zone (search for similar items in EconPapers)
JEL-codes: G31 G34 L41 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-com, nep-ent, nep-ind and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Kill Zone (2020)
Working Paper: Kill Zone (2020)
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