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

Chiara Fumagalli, Massimo Motta and Emanuele Tarantino

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

Abstract: We analyse the optimal policy of an antitrust authority towards the acquisitions of potential competitors in a model with financial constraints and asymmetric information. With respect to traditional mergers, these acquisitions trigger a new trade-off. On the one hand, the acquirer may decide to shelve the project of the potential entrant. On the other hand, the acquisition may allow for the development of a project that would otherwise never reach the market. We first show that a merger policy does not need to be lenient towards acquisitions of potential competitors to take advantage of their pro-competitive effects on project development. This purpose is achieved by a strict merger policy that pushes the incumbent towards the acquisition of potential competitors lacking the financial resources to develop their project independently. An equivalent rule would consist in blocking takeovers whose acquisition price is above a certain threshold. However, we also show that, if the anticipation of a takeover relaxes the target firm's financial constraints, a more lenient merger policy, which allows for the acquisition of firms that have already committed to enter the market, may be optimal. We identify the cumulative conditions necessary for this to be the case. They include the presence of pronounced financial imperfections. Hence, the more developed financial markets, the more likely that a stringent merger policy will be optimal.

Keywords: Conglomerate mergers; Digital Markets; Merger Policy; Potential competition (search for similar items in EconPapers)
JEL-codes: K21 L13 L41 (search for similar items in EconPapers)
Date: 2020-07
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Working Paper: Shelving or Developing? The Acquisition of Potential Competitors under Financial Constraints (2020) Downloads
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