C. Scott Hemphill and Tim Wu on ‘Nascent Competitors’ (2020) University of Pennsylvania Law Review (forthcoming)

A nascent competitor is a firm whose prospective innovation represents a serious future threat to an incumbent. Nascent rivals play an important role in both the competitive process and in developing innovation. New firms with new technologies can challenge and even displace existing firms; sometimes, innovation by an unproven outsider may be the only way to provide new competition to an entrenched incumbent. For competition enforcers, nascent competitors pose a dilemma. While nascent competitors often pose a uniquely potent threat to an entrenched incumbent, the firm’s eventual significance is uncertain, given the environment of rapid technological change in which such threats tend to arise. That uncertainty, along with a lack of present, direct competition, may make enforcers and courts hesitant or unwilling to prevent an incumbent from acquiring or excluding a nascent threat. This essay, available here, identifies nascent competition as a distinct category and outlines a program of antitrust enforcement to protect it. It favours an enforcement policy that…

Chris Pike and Pedro Caro de Sousa ‘How Soon Is Now: How to Deal with Uncertainty as regards Potential Competition in Merger Control’ Competition Law and Policy Debate (forthcoming)

While a short time frame of analysis can help build confidence in the conclusions reached on the likely effects of a transaction within that time frame, it misses potential harms and benefits related to longer-term potential competition. To correct this analytical deficiency requires the use of a longer time frame of analysis. However, with a longer time frame comes greater uncertainty on both probabilities and the magnitude of outcomes. Such prospective assessments often imply the balancing of probabilities by decision-makers, which are subject to substantive, evidentiary and practical constraints. In cases involving potential competition, this uncertainty is further heightened, to the point where meeting evidentiary standards designed for a short time frame analysis can become near impossible. This paper, available here, explores avenues to deal with uncertainty under merger control, and advances two proposals. First, one should ensure that the substantive standards for clearing and prohibiting a merger reflect not only the probability but also the potential magnitude of anti-…

Colleen Cunningham, Florian Ederer and Song Ma ‘Killer Acquisitions’

This paper, available here, argues that incumbent  firms may acquire innovative targets solely to discontinue the target’s innovation projects and preempt future competition. Using pharmaceutical industry data, the paper shows that acquired drug projects are less likely to be developed when they overlap with the acquirer’s existing product portfolio, especially when the acquirer’s market power is large. Conservative estimates indicate 5.3% to 7.4% of acquisitions in the authors’ sample are killer acquisitions, which occur disproportionately just below thresholds for antitrust scrutiny. Section 2 outlines the theoretical framework and develops testable hypotheses. The authors first build a parsimonious model that combines endogenous acquisition decisions, innovation choices and product market competition. The model looks at acquisitions that occur when the innovative target  firm’s project is still under development, and therefore further development is necessary and costly, and the ultimate project success is uncertain. An incumbent acquirer has weaker incentives to continue development than an entrepreneur if the new project overlaps with (i.e….

Andrew Sweeting, Joel Schrag and Nathan Wilson ‘Not All Pre-Emptive Mergers Are Alike: A Classification of Recent Cases’ (2020) CPI October

There has been much recent debate about whether antitrust agencies have been sufficiently attentive to preemptive mergers, where one firm acquires another that it expects will become a more vigorous competitor in the future. The suggestion, sometimes described in terms of “killer acquisitions” (“kill zones”) or, less graphically, “the elimination of nascent competition”, is that agencies may have allowed transactions that, while perhaps not substantially reducing competition in the short-run, deprived consumers of lower prices, better products, and more variety in the future. It has been claimed that these types of mergers have been particularly common in certain sectors, such as the tech and pharmaceutical industries, but it is an open question whether these issues arise more generally. While these issues are important, the nature of the debate might lead people to believe that similar issues are raised by all preemptive merger cases. This paper by three economists at the FTC, available here, argues that this is wrong. It develops…

Giulio Federico, Fiona Scott Morton and Carl Shapiro ‘Antitrust and Innovation: Welcoming and Protecting Disruption’ in Innovation Policy and the Economy (eds. Josh Lerner and Scott Stern, NBER), Vol. 20, Chapter 4, 125

This paper, available here, focuses on the impact of competition policy on innovation. Disruptive firms drive a significant amount of innovation. By making its offer to customers attractive in a new way, a disruptive firm can destroy a great deal of incumbent profit while creating a large amount of consumer surplus. The resulting churn in products and market shares, as new products enter and old ones exit, and as newer business methods and business models supplant older ones, are typical of a healthy competitive process. If that competitive process is slowed or biased by mergers or by exclusionary conduct, innovation is lessened and consumers are harmed. Competition policy seeks to protect the competitive process by which disruptive firms challenge the status quo, despite the biggest firms being some of the most impressive innovators in many industries experiencing rapid technological change. Innovation is best promoted when market leaders are allowed to exploit their competitive advantages while also facing pressure to perform…

Ioannis Kokkoris and Tommaso Valletti ‘Innovation Considerations in Horizontal Merger Control’ (2020) Journal of Competition Law & Economics 16(2) 220

This article, available here, focuses on the assessment of mergers in markets where innovation plays an important role. Innovation considerations have always been on the radar of the European Commission (“Commission”) but came to the limelight with recent decisions in the agrochemical sector. A significant amount of literature has emerged in the last few years, mainly analysing the economics of innovation considerations in merger control. Section II reviews the economic literature on the impact of competition on innovation incentives, while section III describes the debate among economists concerning the effects of horizontal mergers on innovation. The paper begins with a description of the debate on the relationship between innovation and competition – the classical Arrow/Schumpeter/Aghion triad (with a pinch of Shapiro), which I will not rehash again. More importantly, the paper describes how the debate around mergers and innovation has become the subject of increasing attention among economists, particularly in the context of the consolidation of mobile telecommunications and the…