The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

However, once a firm comes to dominate an area after an initial flurry of competition, for example because consumers find it hard to switch away from it because it has their data, the market may come to believe in its continuing dominance. This could make the monopoly self-fulfilling, as Luigi Zingales and I argue.57 In part, this is because the stock market will bid the firm’s share price to stratospheric levels in view of its expected monopoly profits. The firm’s high-priced shares will then give it the currency to buy up any threatening competitors, way before they get to a size where an acquisition might raise antitrust concerns. Indeed, in the pharmaceutical industry, firms even undertake ‘killer’ acquisitions whereby they acquire targets only to shut down promising drug projects that would compete with their existing drugs.58 If the competitor is stubborn enough not to sell out, the dominant firm could threaten a prolonged price war or blatantly mimic the competitor’s product, secure in the knowledge that it has the resources to afford a lengthy court battle over intellectual property. Independent innovators will consequently have a lower incentive to innovate, knowing that their access to the customer is blocked by the dominant firm, and knowing they will eventually have their product replicated or be forced to sell out to it at a discounted price. Indeed, venture capitalists refuse to fund start-ups whose projects lie within a ‘kill-zone’ that can be replicated or ...

Killer aquisitions in pharma using their superstar stock price