Despite a large volume of studies examining the welfare impact of acquisitions, there are not
many studies that model the welfare impact of acquiring new firms. This study offers a review
of the literature and presents a framework for evaluating the welfare impact of the acquisition
of new firms. Our results suggest that the acquisition of new firms is not necessarily welfare
reducing as long as (1) the number of new firm entry is within a given range (i.e., not too many
and not too few), (2) sufficient oligopolistic interdependence is present (output response from
firms not involved in the acquisition or outsider firms), and (3) there are cost symmetries.
The key factor that makes the privately beneficial acquisition welfare enhancing is the profit
opportunity for outsider firms and oligopolistic interdependence, given the restriction on
the number of new firms. Our findings imply that, under the given conditions, start-up
acquisitions may not need to be restricted by merger control policies. Our literature review
and model highlight the need for regulators to pay attention to the specific number of new
firms that enter a given market when there are no cost synergies.
