Kill Zone

47 Pages Posted: 17 Mar 2020 Last revised: 28 Apr 2020

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: April 27, 2020

Abstract

We study why high-priced acquisitions of entrants by an incumbent do not necessarily stimulate more innovation and entry in an industry (like that of digital platforms) where customers face switching costs and enjoy network externalities. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. This creates a “kill zone” in the space of startups, as described by venture capitalists, where new ventures are not worth funding. Evidence from changes in investment in startups by venture capitalists after major acquisitions by Facebook and Google suggests this is more than a mere 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 (April 27, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-19, 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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Washington, DC 20431
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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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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