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 prohibits anticompetitive conduct that is reasonably capable of contributing significantly to the maintenance of the incumbent’s market power. While uncertainty is a ground for caution, the overall balance favours a bias for action, given the importance of innovation and resulting costs of underenforcement. As this suggests, the proper approach does not require proving, as some have argued, that successful competitive entry in the “but-for” world by the excluded innovator would necessarily or probably have occurred. Such a stringent standard would allow too much leeway for the elimination of nascent threats, and even produce a perverse incentive for threatened incumbents to accelerate their anticompetitive action.

Section 2 defines what is meant by nascent competitors and provides paradigmatic examples.

A nascent competitor is a firm whose innovation represents a serious, albeit not completely certain, future threat to an incumbent. Examples include the challenges posed by internet browsers such as Netscape to operating systems in the 1990s; by ‘short read’ DNA sequencing to ‘long read’ DNA sequencing technologies; or by photo sharing and instant messaging apps to social networking sites. The authors extract the meaning of ‘nascent competitor’ from the US Microsoft case. There, the court’s understanding that Netscape was a “nascent . . . competitor” had three important features:

(i) Innovation – a nascent competitor is an innovator. Innovation can take the form of technical progress or new business models that better serve consumer needs. Small, innovative firms have played a particularly important role in the process of innovation and competition. There is particular competitive significance to big innovations at smaller firms, for they also represent competitive entry, and sometimes completely transform the industry (e.g. communications from telegraph to the telephone).

(ii) Innovative potential – a nascent competitor is relevant due to its promise of future innovation. Its potency is not yet fully developed, and hence remains unproven. Whether the nascent competitor’s innovation will make a difference in the marketplace is subject to significant uncertainty. This uncertainty may not be a quantifiable risk, like the odds in a casino, but closer to Knightian true uncertainty—in other words, not readily susceptible to measurement

(iii) Threat to the incumbent – a nascent competitor poses a serious threat to the incumbent. The owner of a tech platform, focused on holding on to its position, may continually scan the horizon for dangerous new technologies or fast‐growing firms that might evolve into competitive threats. Microsoft  in the  1990s and Facebook in the  2000s are good examples of firms that were highly concerned with their own displacement. The prospect of disruptive competition for the market raises the stakes, intensifying the incumbents’ attentiveness to the risk of being usurped.

Section 3 explains how the proposed approach to nascent competitors would fit within competition law.

As a matter of antitrust policy, the importance of protecting innovation by nascent competitors requires searching scrutiny of incumbents’ actions to neutralise such competition. Given the incentive and ability of incumbents to destroy or coopt innovative threats, avoiding that outcome is an important target for enforcement. The risk of lost innovation strongly tips the balance in favour of a bias for action.

Given this, the authors favour an enforcement policy that prohibits anticompetitive conduct that is reasonably capable of contributing significantly to the maintenance of the incumbent’s market power. Where an incumbent (i) eliminates or impedes a nascent competitor through acquisition or exclusion, (ii) that poses the requisite level of competitive threat, and (c) without fully offseting competitive benefits, such conduct should be prohibited.That approach is not only consistent with antitrust law, but directly drawn from Micrososoft, the leading example of US antitrust enforcement to preserve nascent competition.

Notably, this approach does not require proving that successful competitive entry, in the but‐for world, would necessarily have occurred. As a matter of policy, it is widely recognised that even a modest probability of a highly detrimental outcome can lead to a large loss in expected value terms, and ought to be avoided. As a matter of law, the Microsoft court, other courts and enforcement agencies have all recognised the antitrust violation that arises even if the competitive but‐for world is highly uncertain or otherwise incompletely specified. The authors thus disagree with recent suggestions that an enforcer, to establish antitrust liability, should be asked to prove that competition in the but‐for world is more likely than not. The need for such proof is particularly out of place where evidence demonstrates the incumbent’s anticompetitive plan. The authors’ approach, though it addresses competitive threats that had only a modest probability of materialising, does not apply to every threat, no matter how remote. Enforcement would be restricted to conduct that poses serious threats to the incumbent—in particular, those threats that are reasonably capable of significantly contributing to displacement of the incumbent. This approach applies equally to exclusionary conduct and the acquisition of a nascent competitor. Unlike exclusion, the acquisition target welcomes the attention, but that is hardly a guarantee of public benefit. So‐called “killer acquisitions” are a real‐world problem.

Section 3 also discusses how current US federal law applies to nascent competitors.

Section 7 of the Clayton Act applies to mergers and acquisitions, prohibiting deals whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” When a nascent competitor already competes with the incumbent, an enforcer may make use of the presumption of illegality that applies to horizontal mergers that significantly increase concentration. By contrast, where the nascent competitor offers solely future competition, matters are more complex. Some acquisitions have been challenged under the so‐called potential competition doctrine, an aspect of horizontal merger doctrine that focuses upon certain forms of anticipated competition between the two firms. This doctrine is directed against two distinct forms of competitive constraint. The first version, unfortunately named ‘perceived potential competition’, concerns potential entry constrains on present pricing. These constraints already condition the incumbent’s conduct, and hence are quite different from those affecting future competition that is the focus of nascent competition. The second version, called “actual potential competition” (APC), focuses on future competitive benefits. As interpreted by lower courts, such mergers are actionable only where “the competitor ‘probably’ would have entered the market [and] its entry would have had pro‐competitive effects.”

Under this interpretation of the law, the acquisition of a nascent competitor would be nearly impossible to challenge, given the difficulty in establishing the but‐for world with sufficient precision and certainty. Thus, if this approach were the exclusive avenue for challenging acquisitions of nascent competitors, effective enforcement would be impossible. However, the authors argue that ‘nascent competitors’ should be subject to a different approach. APC case law has not addressed or wrestled with the disctinctive features of innovation competition, including its unusually important benefits and the distinctive nature of the uncertainties associated with innovation competition.

Nascent competition is important precisely because of its innovative potential. The appropriate analytical focus is the nature and potential of the unproven competitor’s product, rather than anticipated competition in existing products from an established firm. Relatedly, future innovation often creates uncertainty that the existing potential competition case law is not well equipped to handle. These differences suggest that APC case law should be distinguished in favor of a distinctive doctrinal approach centred on nascent competition. Alternatively, the requirements of APC case law should be relaxed to take account of the distinctive features of nascent competition where it is present.

Further to merger control, an enforcer may challenge anticompetitive acquisitions by an incumbent with monopoly power under Section 2 of the Sherman Act, inasmuch as this may amount to ‘monopolisation’. A government enforcer must show that the anticompetitive conduct was reasonably capable of contributing significantly to the maintenance of market power. This point bears emphasis: the government need not establish that, absent the deal, successful entry was more likely than not to occur, as was made clear in the US case brought against Microsoft. In this case, the court stated that the government only had to establish that the “exclusion of nascent threats is the type of conduct that is reasonably capable of contributing significantly” to monopoly maintenance, and that the targets of exclusion “reasonably constituted nascent threats.” The scope of this holding is subject to debate. But at a minimum, it applies to conduct targeting a nascent competitor in order to maintain a monopoly.

A significant feature of Section 2 is that it positions a court to collectively evaluate a larger set of acts. Section 7 of the Clayton Act, by contrast, is directed to the scrutiny of a single acquisition. To return to the Facebook example, the incumbent acquired multiple firms: Instagram and WhatsApp, plus other, lesser‐known firms. The broad aperture of Section 2 matters because the cumulative effect of multiple acts is greater than a single act.

Section 4 looks at what evidence can be used to protect nascent acquisition.

When an incumbent acquires a nascent competitor, the government, to build a prima facie case, will be required to make some demonstration that the acquisition is anticompetitive. In that undertaking, several forms of evidence may be relevant. Strong evidence of anticompetitive intent to eliminate a competitive threat, and that the acquisition was designed to accomplish that goal, is likely to prove particularly important in these cases. To be clear, the authors do not favor liability simply because an investigation uncovers wishes “to destroy the competition.” Such evidence lacks probative value. What agencies and courts should care about, as always, is evidence of an anticompetitive plan, design or program. The simplest form of intent evidence is documentary evidence of a specific concern with future threats, coupled with conduct that eliminates the threat – such as its acquisition. Beyond such documentary evidence, an anticompetitive design might also be shown by conduct. For example, a firm’s broader pattern of acquiring nascent competitors sheds light on its intent in making each acquisition. Such evidence might be reinforced by proof of an internal program to identify rising competitors that matches up with the firm’s completed and attempted acquisitions.

If the plaintiff presents evidence sufficient to build a prima facie case that the acquisition is anticompetitive, the parties will have the opportunity to offer a procompetitive justification for the transaction. One particularly important justification is that the acquirer improves the targeted business in a fashion that would otherwise never occur (the “incubation” justification). However, credit for incubating a startup is subject to the caveat, common to all merger analysis, that the benefit must be a merger specific efficiency.

Some enforcement actions to protect nascent competitors may take the form of challenges to consummated mergers. The benefits of waiting are more pronounced where there is an initial asymmetry of information between the parties and the enforcer, as is typical in industries marked by rapid technological change. The incumbent has an incentive to exploit its information advantage and acquire a nascent rival during a period when the enforcer has low confidence about the benefits of enforcement. However, this period of asymmetry is not permanent. Several types of evidence may emerge with the passage of time. New witnesses and documents may surface as employees exit the merged firm or leaks occur. A firm’s broader pattern of acquiring many nascent competitors sheds light on its intent relative to what is apparent from a single transaction. An ongoing program of buying up any and all serious nascent threats to maintain dominance might not be clear to the world until much later. Waiting until after the deal has been completed also produces new objective evidence about the competitive effects of the deal. Finally, the passage of time may also furnish new economic evidence and new tools that are useful for evaluating the effects of a particular transaction.

Comment:

As you would expect from the authors, this is a punchy, well-argued brief in favour of increased enforcement against attempts to stifle nascent competition. I found it quite good – and clear – on the US law that would apply to such attempts, and on the evidentiary difficulties that addressing such cases entail. I also particularly enjoyed the acknowledgement that the issue may not be so much the acquisition of individual firms, but the systematic acquisition of potential competitors – and the suggestion that we could rely on traditional antitrust enforcement to address this.

At the same time, and as boundary-pushing as the paper, I think its main limitations come from its strenuous efforts to remain within the existing legal framework. For example, why do the authors argue that innovation is relevant to delimit enforcement as regards future competition? Arguably, many of the cases the authors are concerned about have little or nothing to do with innovation. For example, the authors repeatedly focus on Facebook’s acquisitions – despite the challenge supposedly placed by WhattsApp or Instagram not being related to innovation, but mainly to the ability to prevent competition from emerging by means of network growth. The authors even recognise that their definition of ‘nascent competition’ is restrictive in many ways, since it ‘leaves out future competition where innovation plays no major role or is uncertain for reasons other than the rate and direction of technological change.’ But given the focus on digital firms, and the narrow meaning attributed to ‘innovation’. I wonder how useful is the authors’ approach to the problem they identify. I am also not sure whether this is relevant under the test for protecting nascent competition that the authors outline.

 The best explanation I came up for this is that this focus on innovation is crucial to anchor a normative argument for lowering the threshold for intervention under the current legal framework – which is justified because protecting innovation is so important. I also got a sense that the authors seemed to think that the Microsoft decision on which they so extensively rely applies mainly to instances of potential competition, namely coming from disruptive innovations, and want to hew as closely as possible to this in their argument.

The authors’ efforts to stay within existing legal bounds leads them to stretch the boundaries of the law – in effect, that seems to be the goal of the article. I am not qualified to comment on substantive US law, but I think this leads to stretching evidence rules as well, particularly concerning the value of evidence of intent to suppress nascent competition. On the one hand, the authors say that mere statements of intent are not sufficient. On the other, they seem to argue that expressions of concern with competition, followed by acquisitions of a business, suffice to establish such intent. I have nothing against drawing inferences from internal documents, but these approaches strike me as being in contradiction – no one ever held that merely expressly concern about potential competitors amounts to evidence of anticompetitive harm, so it is hard to understand how that same evidence will provide such evidence if it is followed by a merger. It also strikes me that such evidence will fall well below the threshold the authors are proposing in this paper, but that will depend on the particulars of each case.

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