Axel Gautier and Joe Lamesch ‘Mergers in the Digital Economy’ (2020) Information Economics and Policy

Google, Amazon, Facebook, Apple and Microsoft (GAFAM) make huge investments in research and development, with a cumulated investment of over USD 71 billion in 2017. In addition to these important investments, GAFAM have engaged in extensive mergers and acquisitions (M&A) activity. Between 2015–2017, GAFAM acquired 175 companies, most of which seem to be young and innovative start-ups. Despite their intense merger activities and the vivid debates they generate, little is known about the the GAFAM’s merger strategies. With the exception of a report reviewing the CMA’s decision-making, there is no systematic analysis of the merger activity of the main digital platforms. This paper, available here, provides detailed information and statistics on the merger activity of GAFAM, and on the characteristics of the firms they acquire. Section 2 present the digital platforms’ business model. The authors identify the segments in which each GAFAM firm operates, i.e. the main categories of users they serve and the main revenue sources of each firm,…

Massimo Motta and Martin Peitz ‘Big Tech Mergers’

Big tech mergers occur frequently. The vast majority of such mergers were not reviewed by competition authorities, and those that were have been approved. Nonetheless, competition authorities and governments have become increasingly nervous at the perceived concentration in some digital markets, and at the persistent and increasing market power of some firms operating in digital industries. There is also concern that recent mergers were investigated using an inadequate methodology, possibly leading to wrong decisions. As a result, some of the (many) mergers in digital industries may well have favoured the entrenchment of large firms’ market positions. This paper, available here, explores this possibility, by developing a model and reviewing the main theories of harm that may apply to such mergers. Section 2 develops a simple model to address the possible anti- and pro-competitive effects of start up acquisitions by digital incumbents. This model provides some guidance as to what to expect from such acquisitions and as to the instances in…

Sai Krishna Kamepalli, Raghuram G. Rajan and Luigi Zingales ‘Kill Zones’ (2020) Working Papers 2020-19 Becker Friedman Institute for Research In Economics, University of Chicago

Digital platforms can acquire potential competitors, dissuading others from entering the market and protecting them against disruptive innovations. In a sense, digital incumbents create a “Kill Zone” around their areas of activity, which might discourage new investments. However, the idea that acquisitions discourage new investments is at odds with a standard economic arguments: if incumbents pay handsomely to acquire new entrants, why should entry be curtailed? Why would the prospect of an acquisition not be an extra incentive for entrepreneurs to enter the space, in the hope of being acquired at hefty multiples? This paper, available here, explores why high-priced acquisitions of entrants by an incumbent may not necessarily stimulate more innovation and entry in an industry (like that of digital platforms) where customers face switching costs and network externalities. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. This creates a “kill zone” in the start-up space, as…

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…

Vincenzo Denicolò and Michele Polo ‘The innovation theory of harm: An appraisal’ IEFE Working Papers 103

The relationship between competition and innovation has been explored by a large amount of literature, both theoretical and empirical. Despite this, general results remain elusive. In the light of this, antitrust authorities have generally refrained from taking extreme stances and followed a cautious approach. Intervention has been limited mainly to cases in which the merging firms’ innovative products are close to the commercialisation stage, where  innovation outcomes have been regarded as sufficiently predictable as to be amenable to standard analysis. But policy seems to be changing. The European Commission has gradually shifted the focus of its dynamic merger analysis from product pipelines to “innovation markets or spaces”. This article, available here, argues that the theoretical foundations of innovation theories of harm are too fragile to provide the bases for radical policy changes. Antitrust authorities and the courts should continue to consider the impact of horizontal mergers on innovation by bearing in mind that effects can go either way. Section 2…