Innovation, Learning, and Mergers; Jihong Lee (SNU)

We study market competition between a monopoly incumbent and a potential entrant experimenting with a disruptive innovation. The monopolist can only pursue the uncertain innovation if it buys the disruptor, who nonetheless is more efficient. With synergies, merger happens at low beliefs and killer acquisitions are possible. However, market outcomes are inefficient if and only if the producer extracts less than full surplus. Otherwise, merger takes place too soon, suggesting a role for threshold merger policy. We also identify the possibility of ex ante buy-out effect with asymmetric information.