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Acquisitions, Entry and Innovation in Network Industries

39 Pages Posted: 7 Apr 2011  

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN)

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Joacim Tåg

Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 3 versions of this paper

Date Written: April 5, 2011

Abstract

Why do so many high-priced acquisitions of entrepreneurial firms take place in network industries? We develop a theory of commercialization (entry or sale) in network industries showing that high equilibrium acquisition prices are driven by the incumbents' desire to prevent rivals from acquiring innovative entrepreneurial firms. This preemptive motive becomes more important when there is an increase in network effects. A consequence is higher innovation incentives under an acquisition relative to entry. A policy enforcing strict compatibility leads to more entry, but can be counterproductive by reducing bidding competition, thereby also reducing acquisition prices and innovation incentives.

Keywords: Acquisitions, commercialization, compatibility, entry, network effects, innovation, R&D, regulation

JEL Classification: L10, L15, L26, L50, L86, O31

Suggested Citation

Norbäck, Pehr-Johan and Persson, Lars and Tåg, Joacim, Acquisitions, Entry and Innovation in Network Industries (April 5, 2011). IFN Working Paper No. 867. Available at SSRN: https://ssrn.com/abstract=1804261 or http://dx.doi.org/10.2139/ssrn.1804261

Pehr-Johan Norbäck

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Lars Persson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Joacim Tåg (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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