Abstract
In a framework where entrants must make sunk investment decisions with uncertain returns and have private demand information, we show that the relationship between innovation and exit value is non‐monotone and features an inverted U‐shaped pattern. Consumer surplus is maximised at the lowest exit value that incentivises the investment. These insights are applied to optimal merger policy. An entrant is more willing to innovate to be acquired afterwards, even if it has no bargaining power. This innovation‐for‐buyout effect implies that an entrant is less likely to leave the market under a lenient than a strict merger policy.
Keywords
Exit, Innovation for buyout, Investment, Start-up acquisitions;
JEL codes
- D82: Asymmetric and Private Information • Mechanism Design
- D43: Oligopoly and Other Forms of Market Imperfection
- L52: Industrial Policy • Sectoral Planning Methods
Reference
Michele Bisceglia, Jorge Padilla, Joe Perkins, and Salvatore Piccolo, “Optimal Exit Policy with Uncertain Demand”, The Journal of Industrial Economics, vol. 72, n. 1, March 2024, pp. 516–547.
See also
Published in
The Journal of Industrial Economics, vol. 72, n. 1, March 2024, pp. 516–547