Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2023-08-03
Number: 23-047/VII
Author-Name: Esmée Dijk
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: José Luis Moraga-González
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: Evgenia Motchenkova
Author-Workplace-Name: Vrije Universiteit Amsterdam
Title: Start-up Acquisitions and the 
Entrant’s and Incumbent’s 
Innovation Portfolios
Abstract: An entrant and an incumbent engage in an investment portfolio problem where each chooses
how to allocate its research funds across a rival market, where they compete with one another, and
a non-rival market, where they do not interact. Allowing for acquisitions distorts both players’
incentives to allocate funding across their rival and non-rival projects. We show conditions
under which the incumbent, anticipating the rents that accrue from the monopolization of the
rival market, moves R&D resources from other markets to the rival market. This “incumbency
for buyout effect” lowers the expected rents the entrant obtains from the contestable market,
which gives it incentives to move its investment portfolio away from the rival market. We show
that this strategic effect dominates the usual “innovation for buyout effect” when the entrant’s
bargaining power is below a threshold. Allowing for acquisitions may improve the direction of
innovation of each of the players as well as consumer surplus. Because precisely the shift of
resources towards and away from non-rival projects causes the welfare gains and losses, using
the traditional definition-of-the-market approach to assess the impact of acquisitions should be
reconsidered.
Classification-JEL: O31, L13, L41
Keywords: start-up acquisitions, innovation portfolios, direction of innovation, incumbency for
buyout, innovation for buyout
File-URL: https://papers.tinbergen.nl/23047.pdf
File-Format: application/pdf
File-Size: 768.838 bytes
Handle: RePEc:tin:wpaper:20230047