In the tech sector, the competition for top talent is fierce. The most highly specialized software engineers can make well over $1 million per year — and in a truly open market, they might earn even more than that. But competition for engineering talent can be limited by consolidation in the tech sector, according to recent research by Heski Bar-Isaac, a professor of economics and finance at Rotman. 

In tech, a few giant firms loom large. Companies like Meta, Amazon and Alphabet are all trillion-dollar corporations, and over the years, these giants have acquired hundreds of smaller startups. Some of those acquisitions – such as Google’s 2006 acquisition of YouTube or Facebook’s 2012 purchase of Instagram - have even become an integral part of their brand.

Tech giants have sometimes been accused of making acquisitions with the intention of killing companies that have the potential to become their competition. But the companies themselves often explain their acquisitions by claiming they were seeking to hire the acquired firm’s talent. It is called acquihiring in the industry, and Meta founder and CEO Mark Zuckerberg once even went so far as to say that all of Facebook’s acquisitions were intended to “get excellent people.”

Explanations like Zuckerberg’s are often dismissed as a self-serving excuse used to mask the corporate pursuit of monopolistic power. But Bar-Isaac believes the acquihiring explanation merits more serious interrogation, and argues that acquiring companies could be motivated not by monopoly, but by its counterpart — monopsony.

A monopsony occurs when there is only one buyer for a good or service, which keeps prices artificially low. In this case, tech talent is a highly specialized type of labour, and there are relatively few people with the specialized skills required to develop technologies like artificial intelligence algorithms, which can bring in billions of dollars each year for the corporations they serve. A relative dearth of people with the requisite skills could lead companies to participate in bidding wars that send the salaries of top tech talent into the stratosphere.

In research published in Management Science, Bar-Isaac modelled the effect of this type acquisition. The model found a range of effects for acquihiring companies, startups and employees:

• For large firms, acquihiring has two benefits. It can be more profitable than direct hiring would, and if the acquiring company can credibly present itself as a competitor for a startup’s talent, it can drive down the smaller firm’s value by forcing it to pay its employees higher salaries and thereby eating into its profits.
• Highly specialized employees lose twice in acquihires. First, they never benefit from the upward pressure on salaries that true free market competition would provide. Second, they lose the benefits that come with working at a smaller firm, where employees are often invested in the company’s mission.

“There are not very many employers interested in paying a machine learning engineer $300,000 per year. But the company where an engineer currently works is one of them,” says Bar-Isaac. “It might ultimately be cheaper to reduce the number of options available to a worker than to pay them their market value. When you acquire a startup, you eliminate a rival for engineering labour. So, you can get that labour cheaper than you would if you had to compete with their current employer for their services.”

When a large company acquires a startup, the owners of that startup get paid. And while company employees sometimes do have an equity stake, venture capitalists often have an even bigger one — and lot of the money will go to them.

“If you are genuinely interested in bringing the labour to your company, it is a bit of a puzzle as to why you would not just pay that labour directly,” says Bar-Isaac. “Why would it make sense to pay the company’s owners instead? One reason is to obtain monopsony power.”   

After all, acquisitions can run into the billions of dollars for companies that sometimes have just a few dozen employees. And even the most highly sought after engineer would be tempted by a big enough pay package. Cornering the labour market to keep pay artificially low raises its own brand of antitrust concern. Bar-Isaac notes that monopsony is increasingly on the radar of regulators and legislators, and was recently included in antitrust guidelines released by the United States Department of Justice. In 2022, the District Court of the District of Columbia cited monopsony in the publishing industry as a concern in a decision that blocked the acquisition of Simon and Schuster Publishing by Penguin Random House.

And while highly paid Silicon Valley-types don’t necessarily make the most sympathetic victims, Bar-Isaac argues that is no reason for complacency. “I don't think the question is ‘should we cry over a software engineer earning $250,000 a year instead of $500,000?’” he says. “Just because a worker earns well does not mean that we should prioritize the interests of capitalists who have power over them.”