hero working papers

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

Number: 680
Year: 2022
Author(s): Chiara Fumagalli, Massimo Motta, Emanuele Tarantino
A start-up and an incumbent negotiate over an acquisition price under asymmetric information about the start-up's ability to succeed in the market. The acquisition may result in the shelving of the start-up's project or the development of a project that would otherwise never reach the market because of financial constraints. Despite this possible pro-competitive effect, the optimal merger policy commits to standards of review that prohibit high-price takeovers, even if they may be welfare-beneficial ex post. Ex ante this pushes the incumbent to acquire startups lacking the financial resources to develop independently, and increases expected welfare.

Keywords: Optimal merger policy, selection effect, nascent competitors
JEL codes: L41, L13, K21