Optimal Exit Policy with Uncertain Demand

Michele Bisceglia, A. Jorge Padilla, Joe Perkins and Salvatore Piccolo
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Michele Bisceglia: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
A. Jorge Padilla: Compass Lexecon
Joe Perkins: Compass Lexecon
Salvatore Piccolo: Compass Lexecon

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Abstract: In a framework where entrants must make sunk investment decisions with uncertain returns and have private demand information, we show that the relationship between innovation and exit value is non‐monotone and features an inverted U‐shaped pattern. Consumer surplus is maximised at the lowest exit value that incentivises the investment. These insights are applied to optimal merger policy. An entrant is more willing to innovate to be acquired afterwards, even if it has no bargaining power. This innovation‐for‐buyout effect implies that an entrant is less likely to leave the market under a lenient than a strict merger policy.

Keywords: Exit; Innovation for buyout; Investment; Start-up acquisitions (search for similar items in EconPapers)
Date: 2024-03
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Published in Journal of Industrial Economics, 2024, 72 (1), pp.516-547. ⟨10.1111/joie.12364⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04926232

DOI: 10.1111/joie.12364

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