Working Paper: CEPR ID: DP16826
Authors: Vincenzo Denicol; Michele Polo
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
JEL Codes: L10; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Acquisitions (G34) | Innovation incentives (O31) |
| Innovation incentives (O31) | Innovation (O35) |
| Acquisitions (G34) | Innovation (O35) |
| Acquisitions (G34) | Entrenchment of monopoly effect (D42) |
| Entrenchment of monopoly effect (D42) | Innovation (O35) |
| Acquisitions (G34) | Consumer surplus (D11) |
| Entrenchment of monopoly effect (D42) | Consumer surplus (D11) |
| Entrenchment of monopoly effect (D42) | Prohibit acquisitions (G34) |