October 19th: RagHuram Rajan

Kill Zone (Sai Krishna Kamepalli, Raghuram Rajan, Luigi Zingales, Univ. of Chicago) [pdf]

We study why high-priced acquisitions of entrants by an incumbent do not necessarily stimulate more innovation and entry in the digital platform industry, where there are strong network externalities and some customers face switching costs. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. Even if the incumbent platform does not undertake any of the traditional anti-competitive actions, this creates a “kill zone” in the space of startups, as described by venture capitalists, where the value of entry is reduced. Evidence from changes in investment in startups by venture capitalists after major acquisitions by Facebook and Google suggests this is more than a mere theoretical possibility.

Discussant: Florian Ederer (Yale)