Axel Gautier and Joe Lamesch ‘Mergers in the Digital Economy’ (2020) Information Economics and Policy

Google, Amazon, Facebook, Apple and Microsoft (GAFAM) make huge investments in research and development, with a cumulated investment of over USD 71 billion in 2017. In addition to these important investments, GAFAM have engaged in extensive mergers and acquisitions (M&A) activity. Between 2015–2017, GAFAM acquired 175 companies, most of which seem to be young and innovative start-ups. Despite their intense merger activities and the vivid debates they generate, little is known about the the GAFAM’s merger strategies. With the exception of a report reviewing the CMA’s decision-making, there is no systematic analysis of the merger activity of the main digital platforms. This paper, available here, provides detailed information and statistics on the merger activity of GAFAM, and on the characteristics of the firms they acquire. Section 2 present the digital platforms’ business model. The authors identify the segments in which each GAFAM firm operates, i.e. the main categories of users they serve and the main revenue sources of each firm,…

Massimo Motta and Martin Peitz ‘Big Tech Mergers’

Big tech mergers occur frequently. The vast majority of such mergers were not reviewed by competition authorities, and those that were have been approved. Nonetheless, competition authorities and governments have become increasingly nervous at the perceived concentration in some digital markets, and at the persistent and increasing market power of some firms operating in digital industries. There is also concern that recent mergers were investigated using an inadequate methodology, possibly leading to wrong decisions. As a result, some of the (many) mergers in digital industries may well have favoured the entrenchment of large firms’ market positions. This paper, available here, explores this possibility, by developing a model and reviewing the main theories of harm that may apply to such mergers. Section 2 develops a simple model to address the possible anti- and pro-competitive effects of start up acquisitions by digital incumbents. This model provides some guidance as to what to expect from such acquisitions and as to the instances in…

Sai Krishna Kamepalli, Raghuram G. Rajan and Luigi Zingales ‘Kill Zones’ (2020) Working Papers 2020-19 Becker Friedman Institute for Research In Economics, University of Chicago

Digital platforms can acquire potential competitors, dissuading others from entering the market and protecting them against disruptive innovations. In a sense, digital incumbents create a “Kill Zone” around their areas of activity, which might discourage new investments. However, the idea that acquisitions discourage new investments is at odds with a standard economic arguments: if incumbents pay handsomely to acquire new entrants, why should entry be curtailed? Why would the prospect of an acquisition not be an extra incentive for entrepreneurs to enter the space, in the hope of being acquired at hefty multiples? This paper, available here, explores why high-priced acquisitions of entrants by an incumbent may not necessarily stimulate more innovation and entry in an industry (like that of digital platforms) where customers face switching costs and network externalities. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. This creates a “kill zone” in the start-up space, as…