When a large company acquires a smaller competitor in a digital platform, the change can have wide-ranging and long-lasting effects on market dynamics. 

A recent study by Fisher’s Yongzhi (Alex) Wang and his colleagues explores the impact that acquisitions of app-developing companies on a large digital platform ― Apple’s App Store ― can have across the technology landscape. 

Wang, an assistant professor of management and human resources, takes a deeper dive into the research ― and explains what it means for key stakeholders, namely the companies involved and consumers.

Q: Can you briefly explain the economies of scale and scope that the research uses to evaluate the impact of acquisitions of app-developers?

Economies of scale and scope are classic strategic management concepts. Yet rarely have they been unpacked together in a single study or have been distinguished between demand side and technology side in prior literature. We defined four types of economies:

• Economies of scale on the demand side means that companies that are acquiring others can derive advantages through an enlarged user base where user interactions exist. Examples include Facebook’s acquisitions of WhatsApp and Instagram.
• Economies of scope on the demand side occur when companies that are acquiring others can exploit the same set of users by providing them products across categories that cater to related consumer preferences. An example would be Activision’s acquisition of King.com which strengthened Activision’s game lineups.
• Economies of scale on the technology side are realized when the companies that acquire others integrate shared technologies in the same product categories in order to reduce development costs.
• Economies of scope on the technology side occur when companies that acquire others can leverage a shared set of technologies across different product categories to provide more varieties of products and features.

Our research demonstrates that, when acquiring companies achieve these advantages, it can be anticompetitive within digital platforms in terms of deterring future market entries.

Q: What are the benefits of these acquisitions for large acquiring (app-developing) companies, target (app-developing) companies and consumers?

The benefits for the (typically larger) acquiring companies are realizing the four types of economies.

For the target (app-developing) companies, being acquired itself might be considered beneficial if they consider the option as a successful exit strategy.

Potential benefits for consumers might be short-term, because after acquisitions, the acquiring companies may provide them with more variety of products and features at lower costs.

Q: What are the drawbacks of such acquisitions for large acquiring (app-developing) companies, target (app-developing) companies, and consumers?

The research is less concerned about potential drawbacks for the acquiring companies. But if there are any, potential drawbacks might be post-acquisition integration between the acquiring and target companies.

For incumbent app developers, the primary drawback is that the acquiring companies enjoy greater competitive advantages and become stronger competitors. But most troublesome is that, because of the advantages accumulated by the acquiring companies, potential app developers might give up the motivation to develop apps for the affected product categories. Some may even give up the motivation to become an app developer.

The primary antitrust concern is that, in the longer term, consumers might be deprived of new products and features that can be released by new entrant firms if they had chosen to enter the market. Because new entrants are deterred, consumers would not benefit from their existence.

Q: Can these types of acquisition reduce competition in the app development industry?

On the one hand, these acquisitions with synergies can reduce competition in the app economy by influencing the market size, specifically, by deterring potential entrants so that the total number of competitors becomes smaller. On the other hand, these acquisitions with synergies also reshape the market structure in the sense that they concentrate market power to acquiring firms — imagine they become bigger fish in a smaller pond after acquisitions.

Q: Are the impacts ― positive and/or negative ― of these acquisitions different than acquisitions that happen in other industries?

The primary difference of acquisitions in digital platform markets, compared with traditional industries, is multi-sidedness. We conceptualized three sides of the Apple iOS platform and its App Store: complementors, users, and complementary technologies. Acquiring companies reside on the complementor side of the market, and, through acquisitions, they can develop synergies on the side of users as well as synergies on the side of complementary technologies.

(Video courtesy of Strategic Management Society and the Strategic Management Journal.)