By Jay Ezrielev (Elevecon)
I propose an economic framework for analyzing innovation effects of nascent competitor acquisitions. The framework identifies nine factors as key determinants of innovation effects. These factors are: replacement, nascent market size, synergies, appropriability, nascent market competition, entrenchment, incumbent innovation competition, merger incentives, and entry incentives. The replacement and incumbent innovation competition factors tend to reduce innovation. The other factors tend to increase innovation. The economic framework enables analysts to gauge the relative severity of innovation effects based on the factors present in a transaction and the magnitude of each factor. The framework incorporates insights from the innovation literature and is based on a model of innovation competition that I develop in this article. Under the model, firms engage in dynamic competition by investing in a future innovation.