Kill Zone

55 Pages Posted: 17 Mar 2020 Last revised: 16 Feb 2021

See all articles by Sai Krishna Kamepalli

Sai Krishna Kamepalli

University of Chicago - Booth School of Business

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 15, 2021

Abstract

We study why acquisitions of entrant firms by an incumbent can deter innovation and entry in the digital platform industry, where there are strong network externalities and some customers face switching costs. A high probability of an acquisition induces some potential early adopters to wait for the entrant's product to be integrated into the incumbent's product instead of switching to the entrant. Because of this, the incumbent is able to acquire the entrant for a lower price. Even if the incumbent platform does not undertake any traditional anti-competitive action, the reduction in prospective payoffs to entrants creates a “kill zone” in the space of startups, as described by venture capitalists, where entry is hard to finance. The drop-off in venture capital investment in startups in sectors where Facebook and Google make major acquisitions suggests this is more than just a theoretical possibility.

Keywords: Digital platforms, Acquisitions, Kill Zone

JEL Classification: G34, G31, L41

Suggested Citation

Kamepalli, Sai Krishna and Rajan, Raghuram G. and Zingales, Luigi, Kill Zone (February 15, 2021). Available at SSRN: https://ssrn.com/abstract=3555915 or http://dx.doi.org/10.2139/ssrn.3555915

Sai Krishna Kamepalli

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Raghuram G. Rajan (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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773-702-9299 (Phone)
773-702-0458 (Fax)

Luigi Zingales

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-3196 (Phone)
773-834-2081 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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