Shelving or Developing? Optimal merger policy with potential competitors

Abstract

A start-up and an incumbent negotiate over an acquisition price. The acquisition may result in shelving the start-up’s project or developing a project that would otherwise never reach the market. 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 that cannot develop independently, increasing expected welfare. We also propose empirical tests to identify high-price takeovers that are more likely to exert anti-competitive effects.