Kill Zone

Sai Krishna Kamepalli, Raghuram Rajan and Luigi Zingales

No 27146, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Venture capitalists suggest that incumbent internet platforms create a kill zone around themselves, where any competing entrant is acquired quickly. Consequently, financing new startups becomes unprofitable. We construct a simple model that rationalizes the existence of a kill zone. The price at which an acquisition is done depends on the number of customers the entrant platform can attract if it remains independent, which in turn depends on the number of apps that have adapted to the platform. The prospect of a quick acquisition by the incumbent platform, however, reduces the app designers’ benefits from adaptation, making it harder for a technological superior entrant to acquire customers. This reduces the stand-alone price of the new entrant, decreasing the price at which they will be acquired, and thus reducing the incentives of VCs to finance their entry. We discuss the policy implications of this model.

JEL-codes: G31 G34 L41 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-ino, nep-mic and nep-pay
Note: CF IO
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Citations: View citations in EconPapers (1)

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