Merger Policy and the Timing of Killer and Continuation Acquisitions

Abstract

I study a dynamic game of innovation and takeover between an incumbent and a potential entrant where the entrant knows whether it has the resources to complete a project and compete, but the incumbent does not and can wait to learn about it. Under the assumption that the entrant lacks bargaining power, the equilibrium is inefficient. Killer acquisitions, by which the incumbent takes over and then drops the innovation, occur early and attract the resource-constrained entrant. Continuation acquisitions happen later and always keep the constrained entrant out, blocking socially desirable innovations. To stop killer acquisitions, merger policies require a cap on takeover bids. To encourage continuation acquisitions, they require both a cap and a possibly time-dependent floor. Policies that apply both before and after innovation achieve the optimum with complete information. Those applying only before cause delays, waste entry costs, and may even be unfeasible. The results call for stricter merger control, such as stronger notification rules and unified theories of harms that treat takeovers of nascent and established competitors in the same way.