Killer acquisitions
In this paper, Cunningham and al., show that an incumbent firm may acquire an innovative target and terminate development of the target’s innovations to preempt future competition. This is true when there is positive acquirer-target product overlap and the market is less competitive. They test their theory using pharmaceutical industry data, even though they argue that their results are robust enough to apply to other industries. Their estimates indicate that about 6% of all acquisitions in their sample (or about 45 pharmaceutical acquisitions per year) are killer acquisitions. Eliminating the adverse effect on drug project development from killer acquisitions would raise the pharmaceutical industry’s aggregate drug project development rate by about 4%.
Killer Acquisitions
Authors: Colleen Cunningham, Florian Ederer, Song Ma
From: London Business School, Yale University
High quality versus low quality innovation
Persson and al. argue that the incentive for killer acquisitions by incumbent firms is strongest when the target has developed an innovation of low-quality. When the quality is high the incumbent’s profit from further developing the innovation will be higher than the entry-deterring value. But then, is blocking acquisitions that kill low-quality inventions worthwhile from a welfare point of view? Yes, argue the authors, because:
- Killer acquisitions increase concentration in the market;
- If the products are sufficiently differentiated, the new innovative firms increase consumer welfare;
- Finally, if an innovation is considered low quality because of its high implementation costs, then it is possible that high quality innovations are killed as well.
Acquisition for Sleep
Authors: Lars Persson, Pehr-Johan Norbäck, Charlotta Olofsson,
From: Research Insitute of Industrial Economics, Lund University
