Acquisition-Induced Kill Zones
Abstract
We study how acquisitions by a dominant incumbent affect entry and R&D incentives in markets with multiple startups. We show that acquisitions can create a kill zone, which suppresses entry and distorts the innovation direction of nontargeted startups. The resulting reduced threat of entry may lead the incumbent to shelve the acquired technology. The kill zone effect strengthens targeted startups’ incentives to enter primarily to be bought out and makes acquisitions more attractive to the incumbent than in-house R&D. To balance kill zone distortions to innovation against the potential synergies from acquisitions, a consumer welfare–maximizing merger policy may involve blocking some, but not all, acquisitions.
This paper was accepted by Anita McGahan, strategy.
Funding: C. Wang thanks the Australian Research Council Discovery Project [Grant DP210102015] for the generous financial support. C. Teh thanks the European Research Council (ERC) [Grant 101088307] for the generous financial support.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2024.07841.
