New research suggests blanket bans on Big Tech acquisitions could reduce innovation and slow growth.

Calls to ban major technology platforms from acquiring other firms may be too broad an approach to address concerns about competition in digital markets, according to a new working paper from the Centre for Economic Policy Research and the London School of Economics and Political Science titled Merger Policy for Platforms.

The study develops a new economic model to examine how acquisitions by large digital platforms affect innovation, startup creation and long-run economic growth, finding that while restricting acquisitions could limit the expansion of powerful ‘digital ecosystems’, a blanket ban may also reduce incentives for entrepreneurs to launch new firms.

The research comes amid growing scrutiny from regulators in the United States, the United Kingdom and the European Union over the acquisition strategies of major technology companies such as Google, Amazon, Facebook, Apple and Microsoft. Policymakers have increasingly raised concerns that such firms act as ‘gatekeepers’ in digital markets and may acquire smaller companies to strengthen their market power.

Contrary to popular belief, the research shows that most platform acquisitions occur across industries rather than within a single market. The authors estimate that around 70 per cent of platform acquisitions are cross-industry, spanning sectors that together account for roughly 55 per cent of GDP. This suggests that regulators should think carefully not just about “killer acquisitions” where platforms acquire potential competitors but also about how acquisitions expand platforms’ reach into new sectors.

However, the new research suggests the effects of banning these acquisitions can be more complex than is often assumed.

The study shows that acquisitions have two competing effects on innovation and growth:

• Incentives for entrepreneurship: The possibility of being acquired by a large platform provides an additional motivation for entrepreneurs to start new firms. This is also described as ‘entry for buyout’.
• Expansion of platform ecosystems: Acquisitions also expand a platform’s product ecosystem, potentially making it harder for independent firms to compete.

These two work in opposite directions, creating ambiguity for the overall impact of banning acquisitions. The paper shows that introducing an acquisition ban would likely reduce economic growth in the short run, as startup founders lose an important incentive to enter the market. Over time growth could potentially increase if a reduction in platform dominance created more space for new firms to compete.

To estimate the overall impact, the researchers use data on how much time households spend on digital platforms in the United States. This approach captures the growing role that digital platforms play in everyday consumption and economic activity.

The results suggest that the positive incentive created by the possibility of acquisition slightly outweighs the negative effects associated with expanding platform ecosystems. As a result, a blanket ban on acquisitions would lead to a small but measurable (0.21 per cent) decline in welfare.

The study also examines other platform practices that may affect competition. One example is ‘product tying’, a term describing ways in which platforms can steer users toward their own products rather than those offered by third-party sellers. This might include prioritising their own products in search results, bundling services together within a specific platform or limiting interoperability with competing apps.

The research suggests that policies targeting these practices directly could improve economic outcomes without weakening incentives for entrepreneurship. Targeted competition policies, the authors argue, may therefore be more effective than blanket bans on acquisitions.

Commenting on the findings, lead author Assistant Professor Jane Olmstead-Rumsey from the Department of Economics at LSE and the Centre for Economic Policy Research said: “Banning acquisitions by big tech firms is too blunt a tool to address many of the problems with anticompetitive behaviour by these firms and would have real costs in terms of diminished incentives for new business creation and entrepreneurship.

“Talk to anyone in Silicon Valley and you'll quickly understand that the chance to be acquired by a big tech firm is an important consideration for most start-ups and removing that opportunity risks hampering business dynamism, especially in the short run.”