UK Furman Report – Unlocking digital competition, Report of the Digital Competition Expert Panel,

This Report, which can be found here, follows a review ordered by the UK’s Treasury to make recommendations on changes to competition and pro-competition policy to help unlock the opportunities of the digital economy. The report’s recommendations build on a number of propositions, namely that: the digital economy is creating substantial benefits; that a number of digital markets are prone to tipping and being ‘winner-takes-all’; market concentration in these markets both creates benefits and incurs costs; but government policy and regulation have limitations. In the light of this, the report found that the standard tools of competition policy, evaluating whether mergers can proceed and whether antitrust action is warranted to remedy abuses by companies, could play a role in helping to promote competition and the associated better outcomes for consumers and innovation. To do so, competition policy will need to be updated to address the novel challenges posed by the digital economy. Some of these updates can happen within current powers,…

Jerome Pouyet and Thomas Trégouët ‘Assessing The Impact Of Vertical Integration in Platform Markets’ (2018) Competition Policy International Antitrust Chronicle December

This technical economics paper, which can be found here, argues that, in the context of vertical mergers, indirect network effects create a form of demand complementarity downstream that softens the anticompetitive effects of vertical integration. At the same time, vertical integration creates various sources of market power. How such market power is exerted, and its impact on competition, depends on how the integrated firm balances its price instruments to harness indirect network effects. This depends, in turn, on how each side of the market values the participation of users from the other side, or, in short, the structure of indirect network effects. The authors show, in particular, that there is no systematic correlation between stronger upstream market power and foreclosure of competitors or consumer harm. The paper is structured as follows: Section II introduces a framework to analyse vertical integration with two-sided network effects. The literature on vertical integration between an upstream input supplier and a downstream manufacturer has highlighted…

Reuben Binns and Elettra Bietti ‘Acquisitions in the Third-Party Tracking Industry’

This working paper, which can be found here , draws attention to one particularly complicated kind of digital data intensive industry: third party tracking, in which a firm does not (only or primarily) collect and process personal data of its own customers or users, but focuses instead on collecting data of users of other ‘first party’ services. The authors focus on mergers and acquisitions of third-party tracking firms because they raise some unique challenges which are often missed in regulatory decisions and academic discussions of data and market concentration. The paper is structured as follows: Section 1 contains a brief overview of the technical elements of third party tracking and of the business practices associated with it. This description is somewhat long because it provides a good overview of these business practices; you may want to skip it if you are familiar with them. ‘Tracking’ refers to a range of data collection and processing practices which aim to collate the behaviours…

Makam Delrahim (Assistant Attorney General, Antitrust Division, U.S. DoJ) ‘Antitrust Enforcement in the Digital Era’

In these remarks, hich can be found here, AAG Delrahim defends the ‘broad antitrust consensus that still reigns today’ and considers how it might apply to the digital sphere. He begins by outlining the two key components of the current antitrust consensus. The first is the consumer welfare standard, which requires that some business practices should be condemned as unlawful only where they harm competition in such a way that consumers suffer. The second component is “evidence-based enforcement”. Outside the realm of naked horizontal restraints such as price fixing, bid rigging, and market allocation, antitrust demands evidence of harm or likely harm to competition, often weighed against efficiencies or procompetitive justifications. Evidence-based enforcement also requires a readiness to adapt our existing antitrust framework and tools to new or emerging threats to competition. One such threat comes from digital platforms and the increased market concentration they give rise to. AGG Delrahim considers that the antitrust consensus approach is flexible to new business…

The Competitive Assessment of Vertical Mergers: The ATT/TimeWarner judgment

The decision regarding  the first challenge to a vertical merger brought by the U.S. federal government since 1979  came out recently: it is the ATT / Time Warner merger judgment, decided on 12 June, which can be found at http://www.dcd.uscourts.gov/sites/dcd/files/17-2511opinion.pdf. The DoJ’s case was that the merger would substantially lessen competition in the video programming and distribution market by enabling AT&T to use Time Warner’s ‘must have’ television content to either raise AT&T’s rivals’ video programming costs or to drive those rivals’ customers to AT&T’s video distribution channels.  ATT / Time Warner’s (the merging parties) case was that the video programming and distribution market is in the middle of a revolution where digital players such as Netflix, Amazon and Hulu are integrating video programming and distribution, while companies such as Facebook and Google are syphoning advertising from the TV to the digital space. The merger of AT&T and Time Warner would allow them to catch up to the competition –…

Carl Shapiro and Herbert Hovenkamp ‘Horizontal Mergers, Market Structure, and Burdens of Proof’ (2018) Yale Law Journal 127(7) 1996

This paper, which can be found here, deals with the ‘structural presumption’ for merger control set out in US law by the Philadelphia National Bank case in 1963. In this case, the Supreme Court stated: “That ‘competition is likely to be greatest when there are many sellers, none of which has any significant market share,’ is common ground among most economists, and was undoubtedly a premise of congressional reasoning about the antimerger statute.’ The Supreme Court held that a merger producing a firm that controls an “undue percentage share” of the market and that “results in a significant increase in the concentration of firms in that market” is “inherently likely to lessen competition substantially.” As a result, the merger should be prohibited, at least “in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects” The merging parties can then rebut this structural presumption by showing that the market shares do not accurately…

Ioana Marinescu and Herbert Hovenkamp ‘Anticompetitive Mergers in Labour Markets’ (forthcoming) Indiana Law Journal (2018)

The paper – which can be found here – looks at mergers that facilitate anticompetitive wage and salary suppression from an antitrust perspective. It also looks at other potentially anticompetitive practice in labour markets, so the paper’s title is misleading. The paper’s fundamental argument is that that antitrust law is under-enforced as regards mergers affecting employment markets, and that this is important for several reasons. First, the share of the gross domestic product (GDP) going to labour has been declining at an alarming rate, and this seems to be correlated with an increase in market concentration. Second, US antitrust law does not condemn unilateral price setting by dominant firms – including the setting of wages. A second best solution to the problem of suppressed wages can therefore be found in merger law, which can interdict wage-suppressing mergers before they occur. Third, antitrust law is properly directed at all output reducing practices, and there is certainly no principled reason for excluding…

Carl Shapiro ‘Antitrust in Times of Populism’

This paper – which can be found here – has been surrounded by a lot of publicity, and is a potentially important piece. It begins with an observation that goes to the heart of the debate:  ‘politicians are calling on antitrust to solve an array of problems associated with the excessive power of large corporations’. The author believes that ‘concerns about corporate power, and today’s renewed interest in antitrust, represent an opportunity to strengthen competition policy.’ At the same time, he alerts that the role of antitrust in promoting competition could well be undermined if antitrust is called upon or expected to address problems not directly relating to competition, such as the political power of corporations or income inequality. The ‘central purpose of this article is to assess the relevant economic evidence regarding competition (…) and then, based on that evidence and on antitrust learning and experience, identify ways to improve and strengthen antitrust.’ The paper is structured as follows:…

RBB Brief 54 ‘An innovative leap into the theoretical abyss: Dow/DuPont and the Commission’s novel theory of harm’

This paper contradicts the paper below. It describes how, in Dow/DuPont, the Commission  adopted an innovation theory of harm that is based on a much broader concern than before: namely, that the parties would find it profitable to reduce overall R&D investments post-merger, causing a reduction in the number of innovative pesticide products (as yet unidentified) at some unspecified time in the future.  It then describes the old approach of the Commission, which was concerned with late stage pipeline products. It notes that the assessment of: “a pipeline product (for which practically all the innovation work has been done) and an existing product is substantively no different to the assessment of a merger between two already existing products. In both of these cases, the concern is that the internalisation of the constraint between the rival products may give the merged entity an incentive to increase prices or reduce output, perhaps even discontinuing one of the products altogether to avoid cannibalisation of…

Giulio Federico, Gregor Langus, Tommaso Valletti “A simple model of mergers and innovation” (2017) CESifo Working Paper Series 6539, CESifo Group Munich

This paper, while simple, has some significant (and charged) conclusions. They purport to demonstrate that: (i) merging parties always decrease their innovation efforts post-merger while outsiders to the merger respond by increasing their effort; (ii) a merger tends to reduce overall innovation; (iii) consumers are always worse off after a merger; (iv) the model calls into question the applicability of the ‘‘inverted-U’’ relationship between innovation and competition to a merger setting. The argument goes as follows: A merger between competitors affects the incentives to innovate through two channels: (i) the first channel relates to the (negative) externality that innovation by one firm has on its rival firms. A merger allows the merging parties to partially internalize this innovation externality and thus it lowers the incentives to innovate for the merged firm; (ii) the second channel relates to product market competition. This is relaxed after the merger so that profits increase both when firms do and do not innovate. A highly stylized…