Kill Zone

58 Pages Posted: 8 May 2020 Last revised: 1 Mar 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); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2020

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.

JEL Classification: G31, G34, L41

Suggested Citation

Kamepalli, Sai Krishna and Rajan, Raghuram G. and Zingales, Luigi, Kill Zone (May 2020). CEPR Discussion Paper No. DP14709, Available at SSRN: https://ssrn.com/abstract=3594344

Sai Krishna Kamepalli (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Raghuram G. Rajan

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 )

700 19th Street NW
Washington, DC 20431
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
0
Abstract Views
761
PlumX Metrics