The Effect of Acquisitions on Product Innovativeness, Quality, and Sales Performance: Evidence from the Console Video Game Industry (2002-2010)

Abstract

Previous work has mostly looked at how acquisitions affect firm-level outcomes. This paper investigates how acquisitions affect product-level outcomes in the context of the console video game industry. We model the effect of acquisitions on video games' innovativeness, quality, and sales performance in a Structural Equation Modeling framework. We control for endogenous partner selection by implementing a two-sided matching framework. We jointly estimate these models using a Bayesian MCMC algorithm on a dataset of 5,916 video games released in the UK from 2002 to 2010. We find that video game publishers acquire developers for their product development capabilities and to secure access to hit properties. Prior alliances and geographic proximity between firms also predict acquisitions. We further find that publishers fail to leverage developers' capabilities for ongoing innovation as product innovativeness decreased post-acquisition. Lastly, acquisitions create value through enhanced inter-firm coordination resulting in higher quality products and increased sales performance.