Innovation and startup acquisition

In this paper, we consider two platforms that compete for the development of a new product to integrate into their ecosystems. The new product can be developed either in-house by the platforms or by an independent startup active only in the technology market. The technology of the startup can be transferred to the platforms either exclusively (startup acquisition) or non-exclusively (licensing). A platform acquires the startup’s technology either because it failed to develop the technology itself or to prevent a rival from acquiring it (a killer acquisition). The presence of the startup affects the platforms’ R&D efforts through an insurance effect, which reduces the cost of failed innovation, and a competition effect, which diminishes the returns to innovation. The magnitude of these effects depends on the merger policy decided by the competition authorities. We show that allowing acquisitions stimulates platform innovation, but at the cost of a more concentrated market structure.