ICLE Chief Economist Eric Fruits joined the City Club of Eugene show on NPR affiliate KLCC for a segment on the “kicker” certain Oregon households are scheduled to receive when they file their taxes in 2022. The full segment is embedded below.

Mergers and acquisitions in tech have come under intense scrutiny in recent years. Some fear that Big Tech companies like Google and Facebook have been able to protect their market positions by acquiring smaller would-be competitors and stifling competition as a result.

Read the full piece here.

Executive Summary

The British government is consulting on whether to lower the burden of proof needed by the Competition and Markets Authority (CMA) to block mergers and acquisitions involving large tech companies that have been deemed as having strategic market status (SMS) in some activity. This is likely to include companies like Google and Facebook, but the scope may grow over time.

Under the current regime, the CMA uses a two-step process. At Phase 1, the CMA assesses whether or not a deal has a ‘realistic prospect of a substantial lessening of competition’. If so, the merger is referred to Phase 2, where it is assessed in depth by an independent panel, and remedied or blocked if it is deemed to carry a greater than 50 per cent chance of substantially lessening competition.

The reforms proposed by the government would stop any deal involving a SMS firm that creates a ‘realistic prospect’ of reducing competition. This has been defined by courts as being a ‘greater than fanciful’ chance.

In practice, this could amount to a de facto ban on acquisitions by Big Tech firms in the UK, and any others designated as having strategic market status.

Mergers and acquisitions are normally good or neutral for competition, and there is little evidence that the bulk of SMS firms’ mergers have harmed competition.

Although the static benefits of mergers are widely acknowledged, the dynamic benefits are less well-understood. We highlight four key ways in which mergers and acquisitions can enhance competition by increasing dynamic efficiency:

Acquisition is a key route to exit for entrepreneurs

• Startup formation and venture capital investment is extremely sensitive to the availability of exits, the vast majority of which are through acquisition as opposed to listing on a stock market. In the US, more than half (58%) of startup founders expect to be acquired at some point.
• According to data provider Beauhurst, only nine equity-backed startups exited through IPO in 2019. By contrast, eight British equity-backed startups were acquired last year by Microsoft, Google, Facebook, Amazon, and Apple alone.
• Cross-country studies find that restrictions on takeovers can have strong negative effects on VC activity. Countries that pass pro-takeover laws see a 40-50% growth in VC activity compared to others.
• Nine out of ten UK VCs believe that the ability to be acquired is ‘very important’ to the health of Britain’s startup ecosystem. Half of those surveyed said they would ‘significantly reduce’ the amount they invested if the ability to exit through M&A was restricted.

Acquisitions enable a ‘market for corporate control’

• M&A allows companies with specific skills, such as navigating regulatory processes or scaling products, to acquire startups and unlock value that would otherwise not be realised in the absence of a takeover.

Acquisitions can reduce transaction costs between complementary products

• M&A can encourage the development of complementary products that might not be able to find a market without the ability to be bought and integrated by an incumbent.
• In the presence of network effects or high switching costs, takeovers can be a way to allow incremental improvements to be developed and added to incumbent products that would not be sufficiently attractive to compete users away from the product by themselves.

Acquisitions can support inter-platform competition

• Competition in digital markets often takes place between digital platforms that have a strong position in one market and move into another market, sometimes using their advantage in the original market to gain a foothold in the new one. This often involves them moving into markets that are currently dominated by another digital platform, increasing competition faced by these companies.
• Acquisitions can accelerate this kind of inter-platform competition. Instead of starting from scratch, platforms can use mergers to gain a foothold in the new market, and do so more rapidly and perhaps more effectively than if they had to develop the product in-house.
• There are many examples of this kind of behaviour: Google’s acquisition of Android increased competition faced by Apple’s iPhone; Apple’s acquisition of Beats by Dre increased competition faced by Spotify; Walmart’s acquisition of Jet increased competition faced by Amazon in e-commerce; myriad acquisitions by Google, Amazon, and Microsoft in cloud computing have strengthened the competition each of those face from each other.

The UK risks becoming a global outlier

• There is a serious risk that the US and EU do not follow suit on merger regulation. Although the EU’s Digital Markets Act is highly restrictive in some ways, it does not propose any changes to the EU’s standards of merger control besides changes to notification thresholds.
• It is also unlikely that the US will follow suit. Although a bill has been brought forward in Congress, it may struggle to pass without bipartisan support. In the last Congress, between 2019 and 2020, only 2% of the 16,601 pieces of legislation that were introduced were ultimately passed into law.

The Government’s theories of harm caused by tech mergers are under-evidenced, hard to action, and do not require a change in the burden of proof to be effectively incorporated into the CMA’s merger review process.

The Government should instead consider a more moderate approach that retains the balance of probabilities approach, but that attempts to drive competition by supporting startups and entrepreneurs, and gives the CMA the tools it needs to do the best job it can within the existing burden of proof.

• To support startups, the government should: streamline venture capital tax breaks such as EIS and SEIS, lift the EMI caps to £100M and 500 employees to make it easier for scale-ups to attract world-class talent, and implement reforms to the pensions charge cap to unlock more of the £1tn capital in Defined Contribution pension schemes for investment in startups.
• The CMA should be better equipped to challenge deals that are potentially anti-competitive with lower and mandatory notification thresholds for SMS firms, alongside additional resourcing to bring the cases it believes may threaten competition.
• Most importantly, any new SMS mergers regime should be limited to the activities given SMS designation, not the firms as a whole, to avoid limiting the use of M&A to increase inter-platform competition.

Read the full white paper here.

INTRODUCTION

Petitioners in this proceeding have called for the FTC to use its rulemaking authority pertaining to unfair methods of competition to prohibit employee non-compete clauses and various forms of exclusive dealing. These rulemaking proposals are deeply misguided from both a procedural and substantive standpoint, however.

Bright-line competition rules, as opposed to broader judicially enforced standards, are appropriate only when it is possible to isolate a category of identical practices that routinely harm competition. This is not the case for the categories of conduct currently under consideration. More fundamentally, these calls ignore positive and significant consumer benefits generated by vertical agreements, in general, and exclusive dealing and non-competes, more specifically. Critics seem to assume that powerful firms foist these exclusive agreements upon their helpless commercial partners (whether employees or other companies). Yet a vast body of economic literature clearly rejects this premise. Instead, it shows that these clauses entail costs and benefits that each party must carefully weigh when they a enter into a commercial relationship.

Of course, this does not mean that non-compete clauses or exclusive dealing should be categorically out of bounds for antitrust authorities. Rather, they should be assessed on a case-by-case basis (i.e., under the rule of reason), accounting for both their pro- and anti-competitive potential. This would limit enforcement efforts only to the limited instances where those clauses harm consumers, thereby preserving the tremendous aggregate benefits they generate.

Read the full public comments here.

Abstract

Today’s technology standards are the result of an extraordinary amount of innovation, collaboration and competition. These concepts are interrelated and each is enhanced or enabled by intellectual property. Where these three concepts come together in standards development, it is unsurprising that antitrust concerns are also present. Specifically, the interests of contributors, participants, and implementers must be fairly balanced to ensure that the appropriate types and levels of innovation, collaboration, and competition can occur – and that the public will benefit therefrom. It is important that antitrust enforcement involving standards development organizations and owners of standards essential patents recognize the careful balance of these three concepts. If antitrust enforcement elevates one goal – say competition – at the expense of collaboration and innovation, or if one set of actors in the standards development ecosystem – for example, implementers – is preferred over the other actors, there will likely be devastating effects on the standards development ecosystem.

The tension between innovation, collaboration, and competition in the standards development arena, as well as the divergent interests of contributors, participants, and implementers are not new. The two agencies charged with enforcing competition policy in the United States, the Federal Trade Commission (FTC) and the Department of Justice, Antitrust Division (DOJ), have long wrestled with promoting both innovation and competition, as well as understanding how collaboration can enhance these ideas. Although the policies regarding innovation, competition, and collaboration have historically bounced around, when considering standardized technology, both the FTC and DOJ have recently shifted the balance in favor of implementers and acted in ways that created impediments to innovation (and thus ultimately competition and collaboration) in the standards development area. Between 2015 and 2019, however, the viewpoints of these two agencies diverged. The FTC continued to rely on outdated perspectives and theories that have been called into question. In doing so, the FTC has favored implementers over contributors in ways that are harmful to innovation. On the other hand, the DOJ (under Makan Delrahim) recognized that its previously-held viewpoints are obsolete and was actively seeking to reset the balance between competition and innovation, between innovator and implementer. This paper argues that we must look carefully at the underlying policies driving the agencies’ behavior, both the outmoded viewpoints that the FTC is pressing as well as the innovation-positive perspective that has shaped the DOJ’s actions in recent years. By amplifying the modern perspective and focusing on creating the right incentives for the right reasons, future imbalances that harm innovation, collaboration, and competition in the standards world can be avoided.

Federal Trade Commission (FTC) Chair Lina Khan’s Sept. 22 memorandum to FTC commissioners and staff—entitled “Vision and Priorities for the FTC” (VP Memo)—offers valuable insights into the chair’s strategy and policy agenda for the commission. Unfortunately, it lacks an appreciation for the limits of antitrust and consumer-protection law; it also would have benefited from greater regulatory humility. After summarizing the VP Memo’s key sections, I set forth four key takeaways from this rather unusual missive.

Read the full piece here.

Congressional Republicans face a dilemma in determining how they want to approach Big Tech. Some perceive the largest tech companies to have too much power over political speech, power that can be used to censor conservatives. Many fear that so-called “woke” opinions are artificially promoted by tech companies whose employees agree with them, while news stories that contradict that narrative are downplayed.

Read the full piece here.

INTRODUCTION

Sanofi is seeking to overturn the district court’s grant of summary judgment in favor of Mylan, which held that Mylan’s EpiPen rebate agreements (loyalty discounts) did not foreclose Sanofi from competing in the market for epinephrine auto-injectors. As this brief argues, finding in favor of Sanofi would mark a misguided departure from the error-cost framework that has been the linchpin of modern antitrust enforcement. Loyalty discounts – and the lower prices they bring – routinely benefit consumers. The Court accordingly should not endorse a dubious theory of harm that does not adequately distinguish between procompetitive and anticompetitive behavior, as doing so would chill firms’ incentives to compete on price.

Anticompetitive (that is, consumer-harming) strategies capable of foreclosing even efficient competitors are difficult – often impossible – to distinguish from vigorous competition (which benefits consumers). Courts are compelled to rely on a limited set of observable parameters to infer whether a firm’s behavior falls under one or the other category. This process entails significant pitfalls. See Geoffrey A. Manne & Joshua D. Wright, If Search Neutrality Is the Answer, What’s the Question?, 2012 Colum. Bus. L. Rev. 151, 184-85 (“The key challenge facing any proposed analytical framework for evaluating monopolization claims is distinguishing pro-competitive from anticompetitive conduct. Antitrust errors are inevitable because much of what is potentially actionable conduct under the antitrust laws frequently actually benefits consumers, and generalist judges are called upon to identify anticompetitive conduct with imperfect information.”).

When it comes to allegedly anticompetitive lowering of prices – predation, discounts, and rebates – low prices themselves are the posited mechanism for anticompetitive foreclosure and thus a key component of the liability regimes pertaining to pricing practices. Yet low prices are also precisely the consumer benefit that antitrust law ordinarily seeks to preserve, especially when these low prices are sustained in the long run. In almost every circumstance, rebates and discounts represent welfare-enhancing price competition; nevertheless, economic theory teaches that strategic pricing can be anticompetitive. As Judge Easterbrook described, “[l]ow prices and large plants may be competitive and beneficial, or they may be exclusionary and harmful. We need a way to distinguish competition from exclusion without penalizing competition.” Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 26 (1984). In short, false positives in these settings may be especially costly because they penalize consumer-benefiting low prices.

The challenge for courts is distinguishing between robust competition and anticompetitive conduct when a primary indicator of both – low prices – is the same. Although the dividing line will always be imperfect such that it is not always clear when anticompetitive conduct is occurring, the academic literature and the courts have established guiding rules and standards designed to minimize error, maximize ease of administration, and protect consumer welfare. Sanofi’s approach, by contrast, would increase the risks of wrongly imposing antitrust liability and, in turn, harming consumers, while being more difficult to administer.

Read the full amicus brief here.

Background…

All around the world, policymakers are proposing legislative changes that would drastically alter the ways that online platforms can operate. Motivating these initiatives have been fears that, absent explicit regulation, digital markets would suffer from failures that could not later be remediated.

But…

These putative reforms are not rooted in a rigorous assessment of the costs and benefits of regulatory intervention. In lieu of empirical evidence, lawmakers are relying on highly abstracted theories of potential harm whose bearing on real-world markets is uncertain. Policymakers should instead rely on the tried-and-tested Consumer Welfare Standard that has successfully guided U.S. antitrust enforcement for the better part of a century.

Read the full explainer here.