Mergers and Acquisitions in the Us Video Game Industry: Assessing Theories of Vertical Integration

Abstract: This paper empirically documents the causes and consequences of mergers and acquisitions in the US video game industry. For this purpose, we use a widely used data set from NPD on video game monthly sales from October 2000 to October 2007 that we complement with hand-collected information on the identity of video game developers for all games in the sample and the timing of all mergers and acquisitions during that period. By doing this, we are able to separate the performance of video game developers and publishers before and after an acquisition takes place. During this period of time, we observe that 57 out of roughly 600 upstream game developers were acquired by downstream publishers. Because we are able to observe the developer before and after the acquisition, we are able to build up a simplified version of the integration model in Whinston (2003) and derive testable implications that apply to our empirical setting. First, we show that a developer is more likely to get acquired after releasing a hit game. Second, we find that publishers and developers are likely to underperform after an acquisition takes place. Third, we find that the acquiring party may not need to have contracted in the past with the acquired party. We also explore the impact of developer and publisher location on acquisition decisions as well as game portfolio effects. While we argue that these three findings are difficult to reconcile with Transaction Cost Economics theories, theories of integration that focus on the relevance of non-contractible investments, learning and employment relations do not seem to do much better.