By Caroline Holland, Mozilla Tech Policy Fellow, Former Official at the U.S. Department of Justice Antitrust Division and Chief Counsel of the Senate Antitrust Subcommittee
A range of voices across the political spectrum have raised the alarm about increasing consolidation and concentration in our economy. This issue is particularly acute when it comes to the power that large tech companies and Internet service providers hold over how we interact online. One way (though certainly not the only way) to address this and to ensure healthy competition is to use antitrust law to stop anticompetitive mergers.
While we can debate the need for adopting stricter antitrust law or standards, there are three realistic and immediate areas where the Department of Justice (DOJ) and the Federal Trade Commission (FTC) — the antitrust agencies — can use prevailing antitrust tools to address (or at least begin to address): (1) acquisitions of potential competitors; (2) mergers that would reduce innovation; and (3) vertical mergers. These types of mergers are particularly relevant to promoting healthy and competitive markets in the Internet ecosystem, conditions that are essential for delivering new and innovative products and services to consumers.
Pursuing these types of cases will not be easy. The antitrust agencies must prove their cases with concrete evidence to randomly selected Federal judges. But this should not stand in the way of being bold. In fact, enforcers should be emboldened by numerous recent court wins as well as the growing public appetite for strong antitrust enforcement.
1. Acquisitions of Potential Competitors
Merger review and enforcement is inherently a predictive exercise — to determine whether the effect of a merger “may be substantially to lessen competition, or to tend to create a monopoly.” This requires antitrust enforcers to be forward-thinking and to “interdict competitive problems in their incipiency.” Thus, enforcers should closely scrutinize attempts by powerful and established companies to neutralize competitive threats. Such threats may be presented by small companies that don’t represent a significant share of the market, but that hold the potential to compete meaningfully in the foreseeable future.
We should be especially alert to such acquisitions in the digital sector where the target competitor is often relatively small and in an adjacent business line, and its competition nascent. Vigilance is also necessary when the market has strong “network effects,” that is when the value of the product or service increases with the more users it attains — e.g., telephone networks increased in usefulness as more households obtained telephones and social networks become more useful when more people are part of them. Network effects can facilitate competition by allowing a new firm with a better product to quickly scale up and compete, but they can also put new entrants at a substantial disadvantage and discourage new entry.
Antitrust economists talk about striking the right balance between avoiding false positives (discouraging mergers that would benefit competition) and risking false negatives (failing to deter mergers that would indeed harm competition). But in fast-paced technology industries where network effects are present, we should be a lot more worried about mistakenly allowing companies to kill potential competitors in the cradle than mistakenly stopping a merger. If the antitrust agencies had greater concern about acquisition strategies to gobble up small competitors before they can pose a significant threat, would consumers have benefited from increased competition and innovation from an independent Instagram, Waze, or WhatsApp?
2. Threats to Innovation
A related question that enforcers should be particularly focused on is how a merger will impact innovation. While there has long been a debate about whether competition helps or hinders innovation, most recent analyses show that competition tends to increase innovation. Notably, when the DOJ and FTC updated their Horizontal Merger Guidelines in 2010, they added a section devoted to the potential competitive harm of lessening incentives to innovate. The agencies often point to the threat of increased prices as a basis to challenge mergers, but harm to innovation is often included as a basis for merger challenges and it can even be a decisive justification for blocking a merger.
To the extent merging firms are rival innovators either presently or in the development of future products, the loss of that competition from a merger could mean that consumers would not reap the benefits of new and innovative technology. For example, in 2015, the DOJ praised the abandonment of a merger a based on its concern that competition would have been lost for the “development of equipment for next-generation semiconductors.” The European Commission took the innovation theory of harm a step further when it required divestitures in the Dow/DuPont merger based on non-specific product innovation.
In the digital space, consumer prices may not tell the whole story, or may not tell any story at all because Google and Facebook, for example, don’t charge consumers directly for search or social networking. Therefore, antitrust enforcers must be especially attuned to the impact of a merger on innovation and be willing to bring cases when qualitative evidence, such as internal business documents and post-merger R&D plans, indicate that the acquisition would stifle innovation. However, as the Horizontal Merger Guidelines acknowledge, there may be instances where a merger will enable innovation that might not otherwise have occurred.
3. Vertical Consolidation
Vertical mergers are a hot topic due to the DOJ’s recent lawsuit to block AT&T’s acquisition of Time Warner Inc. But concerns about vertical mergers aren’t new. The antitrust agencies have brought numerous cases against them that imposed conditions on the merged firm, prohibiting it from certain conduct and business practices in order to preserve and protect competition.
The new leadership at the DOJ announced a strong stand on vertical mergers when the Assistant Attorney General of the Antitrust Division, Makan Delrahim, announced that he strongly prefers to block anticompetitive vertical mergers rather than to mitigate the anticompetitive effects of them through conditions. Similarly, the Director of the FTC’s Bureau of Competition, Bruce Hoffman, recently noted that vertical mergers are “very relevant to current enforcement priorities.”
In vertical mergers, we worry about harm to competition from “input foreclosure” and “customer foreclosure.” In the AT&T/Time Warner complaint, the DOJ alleges an input foreclosure problem in that AT&T would have the incentive and ability to foreclose or raise the price of Time Warner Inc. content. As DOJ claims, such content is a critical input needed by rival multichannel video programming distributors (MVPDs) to provide a competitive service to consumers. By denying it or raising the price of it, AT&T would impede the ability of rival MVPDs to compete with its DIRECTV service, competition that would normally lead to lower prices and higher quality service.
On the other hand, a vertical merger raises customer foreclosure concerns when the merged company obtains the incentive and ability to block rivals’ access to customers. For example, the DOJ was concerned about a merged Comcast/NBCU’s incentive and ability to favor the broadband transmission of its own content and online video distribution or degrade and/or slow down competing video content and rival online video distributors (OVDs).
By requiring Comcast to adopt net neutrality-like rules that require it to treat all Internet traffic the same, the consent decree protected the ability of OVDs to reach consumers and compete. Since then, the OVD marketplace has thrived. The expiration of these conditions in September 2018, in addition to the FCC’s repeal of the Open Internet Order guaranteeing net neutrality, merit a serious look by DOJ into whether this condition, among others, should be extended.
Vertical mergers that create market power capable of stifling competition could be particularly pernicious when it comes to digital platforms. For example, imagine that a digital platform or Internet-related service becomes a dominant and essential gateway for serving content and reaching consumers. Then, that platform seeks to acquire a content company that previously competed with other content providers for placement on its platform or service. You can see how the platform might have the incentive and ability to favor its own content and stifle the ability of competing content to reach consumers, thus depriving consumers of competitive and innovative offerings.
It is important to note that it would not normally be an antitrust violation for a digital platform to build and grow its own content business and compete with rival content providers on its platform (though it’s conceivable such a vertically integrated company could violate the antitrust laws if it engaged in exclusionary conduct in violation of Section 2 of the Sherman Act, like in the Microsoft case). But, growth and vertical integration by acquisition is subject to greater scrutiny and enforcers should be skeptical about allowing it in the digital space where there are dominant players not materially constrained by competition upstream or downstream along the supply chain.
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As useful as current law may be for these merger scenarios, it is worthwhile to discuss other potential ideas for addressing concentration. Top antitrust economists and scholars are exploring the scope of more aggressive antitrust enforcement under existing law. Senator Amy Klobuchar introduced bills that are a solid starting point for discussions about whether and how to amend antitrust law. For example, the Consolidation Prevention and Competition Promotion Act would strengthen merger enforcement in part by putting a strong thumb on the scale in favor of the DOJ and FTC to stop the largest mergers in the most concentrated industries. This would help deter those mergers that “never should have made it out of the boardroom” and help free up agency resources to pursue more of the types of cases described above.
Some advocates say that the antitrust agencies should be tasked with conducting a broad “public interest” test to examine, for example, how a merger would impact jobs or main street businesses. Others advocate for an outright ban on acquisitions by certain powerful technology companies.
While it is important to debate our expectations and desires for antitrust law, a key first step is for the DOJ and FTC to use current law to address the anticompetitive effects of concentration and identify where these tools can be applied more forcefully. Regarding mergers, the antitrust agencies should be laser focused on what they do best — determining how a merger will impact the competitive landscape of a market (up and down the supply chain) and the resulting effects on consumers. In doing so, we should encourage the antitrust agencies to be bold when examining merger harm related to potential competition, innovation, and vertical integration.
* Special thanks to those who took the time to read drafts and provide me with feedback and suggestions. I welcome further comments and feedback.