A New Report Says That Tech Mergers Are Stifling Innovation

A New Report Says That Tech Mergers Are Stifling Innovation

Mark Jamison

Technology, Americas

How is that affecting consumers?

“Theory and practice should not contradict one another.” George J. Stigler

Sometimes researchers make claims that can grab headlines, but upon further investigation, their theories don’t line up with reality.

A recent paper and accompanying blog follow this pattern. They conclude that merger policy in tech should block more mergers, including mergers that would make consumers better off, because doing so increases innovation. That’s pretty surprising! Even if each approved merger makes consumers better off, the overall effect is consumer harm? How could that be?

The paper develops a theory in which blocking even good mergers makes more consumers drop their old services in favor of those offered by new entrants, leading to more successful startups. More startups mean more innovation because incumbents never innovate, according to this paper’s theory.

To show that the theory works in practice, the paper looks at nine tech acquisitions and concludes that, true to the theory, investment in startups declined once an acquisition occurred. Less investment means fewer startups, which means less innovation, according to the paper.

But does the theory really align with the cases as the paper and blog claim? No.

The theory makes a few key assumptions that drive its results. These include:

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