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M&A and early investment decisions by digital platforms

Author

Listed:
  • Zelda Brutti

    (Universitat Pompeu Fabra
    Barcelona School of Economics
    Institut d’Economia de Barcelona)

  • Luis E. Rojas

    (Barcelona School of Economics
    Autonomous University of Barcelona)

Abstract

We propose an original theoretical framework that models early investment decisions of digital platform startups and use it to study how merger and acquisition policy affects consumer welfare by shaping such decisions. We formalize the investment options faced by digital platforms into a dual margin: investment in ‘customer engagement technology’, directed towards expanding the user base and in ‘intermediation technology’, directed towards lowering operational costs. Synergies through technological transfer and increased investment incentives in customer engagement explain consumer welfare improvements in the case of M&As occurring between platforms with disjoint user bases. On the other hand, lower competition erodes consumer welfare in the case of allowing M&As between platforms with overlapping user bases. We conclude that M&A policy guidance should depend on the relationship between the incumbent’s and startup’s target users and on the ability of the startup to catch up with the incumbent.

Suggested Citation

  • Zelda Brutti & Luis E. Rojas, 2022. "M&A and early investment decisions by digital platforms," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(3), pages 509-543, September.
    • Handle: RePEc:spr:epolin:v:49:y:2022:i:3:d:10.1007_s40812-022-00223-3
    DOI: 10.1007/s40812-022-00223-3
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    References listed on IDEAS

    as
    1. Gautier, Axel & Lamesch, Joe, 2021. "Mergers in the digital economy," Information Economics and Policy, Elsevier, vol. 54(C).
    2. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust [Ex-post assessment of merger control decisions in digital markets]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 30(5), pages 1307-1336.
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    5. Kevin A. Bryan & Erik Hovenkamp, 2020. "Antitrust Limits on Startup Acquisitions," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(4), pages 615-636, June.
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    9. Geoffrey Parker & Georgios Petropoulos & Marshall Van Alstyne, 2021. "Platform mergers and antitrust," Working Papers 43276, Bruegel.
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    Cited by:

    1. Christian Fons-Rosen & Pau Roldan-Blanco & Tom Schmitz, 2022. "The Effects of Startup Acquisitions on Innovation and Economic Growth," Working Papers 944, Queen Mary University of London, School of Economics and Finance.
    2. Federico Boffa & Amedeo Piolatto & Evila Piva & Florian Schuett, 2022. "Industry dynamics in digital markets," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(3), pages 401-407, September.

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    More about this item

    Keywords

    M&A; Digital platforms; Platform competition; Consumer welfare;
    All these keywords.

    JEL classification:

    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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