Innovation, Exit, and Restrictions on Tech Mergers and Acquisitions

Antitrust reform advocates view the acquisition of small innovative companies by large technology “platform” companies as a primary competitive problem in digital markets. To remedy this perceived problem, these advocates recommend restrictions on mergers and acquisitions including market-share presumptions. In this BULLETIN, we find that statutory restrictions on acquisitions by the large platforms adversely affect investments in innovations and alter the innovator-investor exit strategy, incentivizing innovators to transfer their innovations to dominant firms in even earlier stages to avoid antitrust scrutiny. These statutory prohibitions may encourage innovators to choose this early exit strategy despite it being inefficient, and will additionally drive more in-house innovation at the big firms and less external innovation. Similarly, these prohibitions on later-stage acquisitions are shown to reduce the returns to innovation, reducing technological advancement in the industry