Mark A. Lemley and Andrew McCreary on ‘Exit Strategy’ 101 B.U. L. Rev. (forthcoming, 2021)

The venture capital funding model that dominates the tech industry is focused on the “exit strategy”— the ways funders and founders can cash out their investment. While in common lore the exit strategy is an initial public offering (IPO), in practice IPOs are increasingly rare – they now account for fewer than 1 in 10 exits for start-ups, and happen later in a company’s life than they used to. Instead, most companies that succeed exit the market by merging with an existing firm. Innovative start-ups are especially likely to be acquired by the dominant firm in the market, particularly when they are venture funded, for a variety of reasons – because the dominant firms value the target’s technology, because they have lots and lots of money, or to eliminate a potential competitor who might leapfrog them in Schumpeterian competition. This paper argues that this focus on exit, particularly exit by acquisition, is pathological and one of the main reasons for…

Andre Minuto Rizzo ‘Digital Mergers: Evidence from the Venture Capital Industry Suggests That Antitrust Intervention Might Be Needed’ (2020) Journal of European Competition Law & Practice

There is a growing debate around the possible existence of a kill zone around tech titans. This is an area where venture capitalists will not finance start-ups because of fear of both exclusionary conduct and aggressive acquisition strategies by technology incumbents. This paper, available here, draws upon existing literature and antitrust agencies’ work, as well as data from the venture capital industry, to argue for the need to investigate the existence and magnitude of the kill zone, as well as its possible causes. Section II looks at evidence from the venture capital industry. Venture capital consists of equity investments in companies with innovative ideas characterised by both high growth potential and high risk of failure. Venture capitalists invest across different stages of the life cycle of start-up companies. Recent years have seen larger and later-stage deals, with funds being funnelled to fewer companies, many of which are large enough to be valued at over USD 1 billion, together with a…

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…

Case review of Apple v. Pepper  Harvard Law Review (2019) 33 382

Since Illinois Brick, standing to sue for violation of US federal antitrust law has been reserved exclusively to those parties who purchased directly from price-setting monopolists or cartelists. Indirect purchasers, who transacted with these direct purchasers rather than with the monopolist itself, had no standing, even if the direct purchaser “passed on” the full cost of the monopolistic overcharge to them in the form of higher prices. The Court prohibited these pass-through arguments because it judged itself ill suited to efficiently determine what parts of an overcharge are passed on at any given stage in the chain of distribution. The Court also worried that allowing pass-through arguments would undermine deterrence, as indirect purchasers, who could not sue as effectively as direct purchasers, would be able to claim a portion of what would previously have gone to direct purchasers in a successful suit. Last year, however, the Supreme Court in Apple v Pepper held that app purchasers could sue Apple for…

Herbert Hovenkamp ‘Apple vs. Pepper: Rationalizing Antitrust’s Indirect Purchaser Rule’ (2020) Columbia Law Review Forum 120(1) 14

The simplest measure of loss caused by an antitrust infringement is the amount of the overcharge caused by a conduct. However, customers of the infringing party may be able to pass on this overcharge to their own customers, which means that indirect purchasers may also suffer loss. The US – unlike other countries – typically limits the ability to claim damages to direct purchasers for the amount of the relevant overcharge (typically trebled). In Apple Inc. v. Pepper, the Supreme Court held that consumers who allegedly paid too much for apps sold on Apple’s App Store because of an antitrust violation could sue Apple for damages because they were “direct purchasers”. The paper, available here, argues that, working within the context of applicable rules, the majority reached the right conclusion. At the same time, and while this judgment eliminates some of the irrationalities of the indirect purchaser rule as it has been applied, it hardly adopts a definite solution to the…

Andrew Gavil ‘Consumer welfare without consumers? Illinois Brick after Apple v Pepper’ (2019) Journal of Antitrust Enforcement 7 447

This essay, available here, examines the recent Apple v Pepper decision with a focus on two issues: its seeming rehabilitation of compensation principles and its approach to evaluating antitrust damages. Together, these two aspects of the Court’s reasoning may undermine the continued vitality of Illinois Brick’s decision not to allow indirect purchasers to claim for damages. The author argues that, although the Supreme Court formally retained Illinois Brick, the Court’s logic in explaining the nature of damages that flow from antitrust violations will prove hard to contain and difficult to reconcile with Illinois Brick’s simplistic conception of ‘pass-on’. That, in turn, will likely alter how parties litigate antitrust damage claims in ways likely to invite future challenges to Illinois Brick. Apple v Pepper also may have reopened long-simmering debates in the USA about how best to balance the twin remedial goals of deterrence and compensation. Given the evolution over four decades of a fairly intricate federal-state, public–private enforcement ecosystem in the USA,…

Viktoria Robertson on ‘Excessive Data Collection: Privacy Considerations and Abuse of Dominance in the Era of Big Data’ (2020) Common Market Law Review 57 161

It is debatable whether EU competition law already contains – or could and should potentially develop – antitrust theories of harm that apply to third-party tracking of personal user data on the web. Focusing on data gathering, this paper – available here – assesses two scenarios under which EU competition law may deem the vast amounts of data gathered by certain digital platforms excessive: excessive data “prices” and unfair data policies. In both cases, the competition law assessment is autonomous from other areas of the law: while a breach of data protection rules is not automatically a breach of competition law, a company adhering to data protection rules may still violate competition laws. The paper finds that EU competition law already possesses the necessary tools to address excessive data collection, while data protection rules provide much-needed context for this type of exploitative abuse. Section II discusses data gathering through third-party tracking. Tracking occurs both on the web and in applications (apps) for electronic…