Working Paper: CEPR ID: DP15113
Authors: Chiara Fumagalli; Massimo Motta; Emanuele Tarantino
Abstract: 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 start-ups lacking the financial resources to develop independently, and increases expected welfare.
Keywords: optimal merger policy; selection effect; nascent competitors
JEL Codes: L41; L13; K21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high acquisition price (G19) | antitrust authority infers startup viability (K21) |
| high acquisition price (G19) | potential suppression of competition (L49) |
| low acquisition price (G19) | indicates startup is unviable (M13) |
| low acquisition price (G19) | no impact on competition (L49) |
| optimal merger policy (L21) | prohibits high-price takeovers (G34) |
| prohibiting high-price takeovers (G34) | enhances overall welfare (I31) |
| high acquisition price (G19) | anticompetitive behavior (L41) |