N°25-93: Entry and Acquisitions in Software Markets

New entry is thought to be the primary competitive margin in software markets. I study how acquisitions of venture capital-funded startups affect entry incentives. I assemble a product-level dataset of enterprise software and use text-as-data methods to define markets. I build and estimate a dynamic entry model where acquisitions affect returns to entry via (1) changes in market structure and (2) an entry-for-buyout incentive. In counterfactual simulations, banning all startup acquisitions reduces entry by about 16% in the average market, whereas blocking high-priced deals conducted by incumbents slightly raises entry. These results indicate which acquisitions might merit prioritized scrutiny.