<h2>ABSTRACT</h2>
<p>We study dynamic market competition between a monopoly incumbent and an entrant experimenting with disruptive innovation. The incumbent can pursue the uncertain innovation after acquiring the disruptor, who may be more productive and privately know its ability. Mergers generate synergies. We characterize perfect equilibria in Markov strategies on bargaining and R&D. The equilibrium path is determined by the interaction between market belief in the unobservable state and the distribution of private information. Asymmetric information generates failed mergers and buyout effects. Inefficient mergers arise from imperfect returns to R&D. There may be under- or over-investment. We provide implications for antitrust policy.</p>
