Acquisitions, innovation, and the entrenchment of monopoly

Vincenzo Denicolo and Michele Polo

No 16826, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze a dynamic model of repeated innovation where inventors may be acquired by an incumbent or else challenge its leadership. In the short run, acquisitions always spur innovation because of the invention-for-buyout effect. In the long-run, however, acquisitions may stifle innovation because of a countervailing effect, the entrenchment of monopoly. The entrenchment-of-monopoly effect arises when the incumbent's dominance depends on its past activity levels and thus is reinforced by repeated acquisitions over time. We show that if the entrenchment-of-monopoly effect is sufficiently strong, forward-looking policymakers should prohibit acquisitions in the anticipation of their long-run negative impact on innovation. This argument provides a new theory of harm that can be used to block acquisitions that might otherwise go unchallenged.

Keywords: Acquisitions; Innovation; market power; Antitrust policy (search for similar items in EconPapers)
JEL-codes: L10 L40 (search for similar items in EconPapers)
Date: 2021-12
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