Working Paper: CEPR ID: DP18272
Authors: Luis Cabral
Abstract: I develop and calibrate a game of startup innovation, incumbent acquisition and merger review, with a focus on industries with uncertainty about the nature of the entrant (complementor or substitute with respect to the incumbent). I estimate that moving from balance of probabilities (the current US and EU system) to balance of harms (proposed for, though not adopted, in the UK) leads to a 15% welfare increase. A complete ban on mergers, in turn, would imply a 35% welfare decrease. No enforcement at all is not significantly different from balance of probabilities. Finally, committing to a more lenient standard than balance of harms increases welfare: under balance of harms, about 25% of all mergers would be blocked, whereas the optimal threshold would lead to only 15% of all mergers being blocked, which in turn would imply an additional 2% increase in welfare. The ordering of proposals is very robust to changes in key parameters. I consider some extensions of the basic framework, including reverting the burden of proof of pro-competitive effects.
Keywords: mergers; acquisitions; merger policy; digital platforms
JEL Codes: L1; L4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| balance of probabilities (D81) | balance of harms (K41) |
| balance of harms (K41) | consumer welfare (D69) |
| complete ban on mergers (L41) | consumer welfare (D69) |
| more lenient standard than balance of harms (K41) | consumer welfare (D69) |
| merger policy (G34) | innovation incentives (O31) |