Acquisition vsus de novo entry: A theoretical appraisal

In this paper we generalize the approach developed in the context of banking competition by Gabszewicz et al. (2011). In an entry/acquisition game, we allow the potential entrant in a vertically differentiated market to offer a variant lying at any level of the quality ladder and playing a priori either the role of acquirer or acquired firm. This more general approach enables to give account of a wider set among the different types of acquisitions taking place worldwide. Not only does it constitute a natural toolbox for representing the choice between acquisition vsus greenfield considered in trade theory, but it also allows to capture the exchange of innovation's ownership via acquisition, as analyzed in the literature of innovation.

► This paper analyzes the entry dilemma: Greenfield investment or acquisition? ► The dilemma is solved in a vertical differentiated market. ► The optimal entry mode is defined in a three stage game. ► At equilibrium, in the case of entry, acquisition is always preferred over greenfield. ► When the entrant' quality becomes sufficiently higher, greenfield can become more advantageous.