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Antitrust Limits on Startup Acquisitions

June 2020
Review of Industrial Organization 56(2)

Authors:

Should there be limits on startup acquisitions by dominant firms? Efficiency requires that startups sell their technology to the right incumbents, that they develop the right technology, and that they invest the right amount in R&D. In a model of differentiated oligopoly, we show distortions along all three margins if there are no limits on startup acquisition. Leading incumbents make acquisitions partially to keep lagging incumbents from catching up technologically. When startups can choose what kind of technology they invent, they are biased toward inventions that improve the leader’s technology rather than those that help the laggard incumbent catch up. Further, upon obtaining a pure monopoly, the leading incumbent’s marginal willingness to pay for new technologies falls abruptly, which diminishes private returns on future innovations. We consider antitrust measures that could mitigate these problems.

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Vol.:(0123456789)

Review of Industrial Organization (2020) 56:615–636

https://doi.org/10.1007/s11151-020-09751-5

1 3

Antitrust Limits onStartup Acquisitions

KevinA.Bryan1· ErikHovenkamp2

Published online: 26 March 2020

Abstract

Should there be limits on startup acquisitions by dominant ﬁrms? Eﬃciency requires that

startups sell their technology to the right incumbents, that they develop the right technol-

ogy, and that they invest the right amount in R&D. In a model of diﬀerentiated oligopoly, we

show distortions along all three margins if there are no limits on startup acquisition. Leading

incumbents make acquisitions partially to keep lagging incumbents from catching up tech-

nologically. When startups can choose what kind of technology they invent, they are biased

toward inventions that improve the leader’s technology rather than those that help the laggard

incumbent catch up. Further, upon obtaining a pure monopoly, the leading incumbent’s mar-

ginal willingness to pay for new technologies falls abruptly, which diminishes private returns

on future innovations. We consider antitrust measures that could mitigate these problems.

Keywords Antitrust· Startups· IO theory

1 Introduction

Startup acquisitions are ubiquitous—particularly in high-tech industries. Frequently

the acquiring ﬁrms are established incumbents with signiﬁcant market power,

as illustrated by Facebook’s acquisition of WhatsApp or Google’s acquisition of

Waze. Many large technology ﬁrms acquire ten or more startups per year. To be

sure, startup acquisitions play an important role in facilitating entrepreneurship and

innovation (e.g. Rasmusen 1988). However, over time, persistent startup acquisi-

tions by highly dominant incumbents may provoke countervailing competition

policy concerns. In the aggregate, such acquisitions may have signiﬁcant adverse

eﬀects on market structure, competition, and the diﬀusion of innovations. Indeed,

there is growing empirical evidence that decreased business dynamism and lower

* Kevin A. Bryan

kevin.bryan@rotman.utoronto.ca

Erik Hovenkamp

ehovenkamp@law.usc.edu

1 Rotman School ofManagement, University ofToronto, 105 St. George St, Suite 7034, Toronto,

ONM5S3E6, Canada

2 USC Gould School ofLaw, 699 Exposition Blvd, LosAngeles, CA90089-0071, USA

Content courtesy of Springer Nature, terms of use apply. Rights reserved.

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