Abstract

The U.S. Constitution divides authority over commerce between states and the national government. Passed in 1890, the Sherman Act (“the Act”) reflects this allocation of power, reaching only those harmful agreements that are “in restraint of… commerce among the several States.” This Article contends that the Supreme Court erred when it radically altered the balance between state and national power over trade restraints in 1948, abruptly abandoning decades of Sherman Act precedent that had recognized exclusive state authority over most intrastate restraints. This revised construction of the Act contravened the statute’s apparent meaning, unduly expanded the reach of federal antitrust regulation, and undermined the regime of competitive federalism that had governed most intrastate restraints for more than five decades.

Drawing from its Commerce Clause jurisprudence of dual federalism, the Court initially employed the direct/indirect standard to allocate regulatory authority over intrastate restraints. Effects were direct if a restraint exercised market power to injure out-of-state consumers. The Sherman Act exerted Congress’s exclusive authority over such restraints, because state regulation might produce self-interested results contrary to the anti-favoritism principle that animated Commerce Clause jurisprudence. States retained exclusive authority over agreements producing indirect impacts on interstate commerce, and a regime of competitive federalism generated the rules governing such restraints. Because states internalized the full impact of such restraints, interjurisdictional competition likely tended to produce optimal legal rules.

Echoing Wickard v. Filburn, the Court jettisoned the direct/indirect standard in 1948, holding that the Act reaches restraints producing a “substantial effect” — even if harmless and indirect — on interstate commerce. This vast expansion of the Act undermined the regime of competitive federalism that had governed most intrastate restraints. This change also enabled application of the statute to local, state-approved restraints, empowering antitrust courts to supervise state regulatory processes, further undermining competitive federalism.

The Court has offered three rationales for rejecting the direct/indirect standard. First, the Court has claimed that Congress meant to reach restraints beyond the authority implied by pre-1890 dual federalism jurisprudence. Second, the Court has contended that the Act properly expands whenever the commerce power expands in other contexts. Third, the Court has treated the substantial effects test as a translation of the Act justified by a changed national economy. The Court has invoked the Act’s legislative history to bolster the first two contentions.

None of these rationales survives scrutiny. First, the phrase “restraint of… commerce among the several States” was apparently a term of art drawn from pre-1890 Commerce Clause jurisprudence. That case law employed “restraint” of interstate commerce as a synonym for state “regulation” of commerce deemed invalid because it directly burdened interstate commerce. Given the prior construction canon, Congress’s invocation of “restraint of… commerce” suggests that the Act should condemn only those private agreements that “directly burden” interstate commerce. The Court read the Act exactly this way in the1890s, repeatedly holding that intrastate or interstate agreements only restrained interstate commerce if they imposed direct burdens by producing supracompetitive prices for interstate transactions. These near-contemporaneous readings, themselves probative of original meaning, avoided constitutional difficulties that would have resulted from application of the Act to restraints causing no interstate harm.

Second, assertions that Congress chose to exercise whatever power future Courts might grant are speculation. Congress has declined to exercise its entire commerce power when enacting three different post-1890 antitrust statutes. Moreover, engrafting the substantial effects test onto the Sherman Act contravened the federal-state balance canon by supplanting traditional state prerogatives over intrastate restraints threatening no interstate harm.

Third, the substantial effects test is not a faithful translation of the Sherman Act in light of new facts. No court or scholar has identified changed circumstances that justify such a translation. Neither integration of the national economy nor increased scale of enterprises suggests that intrastate restraints generally produce interstate harm or that states are incapable of regulating them.

The legislative history bolsters this textual analysis. Several Senators endorsed pre-1890 dual federalism jurisprudence. The Senate Judiciary Committee rewrote Sherman’s bill, employing the term “restraint of commerce” to narrow its reach. The House passed the Senate bill verbatim, after its Judiciary Committee also embraced dual federalism. No member of Congress suggested that the Act would expand if the Court subsequently enlarged the scope of the commerce power.

The conclusion that the Court erred in 1948 does not itself justify return to the pre-1948 allocation of authority over antitrust matters. While stare decisis is weaker in the antitrust context, mere legal error does not suffice to upset longstanding precedent. If, however, the Court attributes the 1948 revision and continued expansion of the Act to changed economic circumstances — such as increased integration of the national economy — stare decisis should yield to post-1948 developments in the theory of competitive federalism. These developments confirmed that states possess appropriate incentives to generate impartial rules with respect to restraints that produce no interstate harm.

Reviving the direct/indirect standard would reboot competitive federalism in antitrust. The resulting competition between state “laboratories of democracy” would generate various substantive and institutional solutions to antitrust problems, as states vie for producers and consumers by offering rival packages of antitrust doctrine and enforcement institutions. Restoring the pre-1948 regime would also radically shrink the category of state-approved restraints potentially subject to the Act. Cases involving such restraints that did reach the Court would look quite different from those that have informed the Court’s treatment of these restraints. Instead of state regulation of local billboards and the like, such cases would involve restraints imposing substantial harm on out-of-state consumers. This new framing could force the current Court, which has less faith in regulation than its predecessors, to reconsider its approach to state-approved restraints.

Abstract

Among the numerous legislative initiatives implemented around the globe on digital platforms, some of these provisions are explicitly directed towards app stores. As they have all the distinctive features of multi-sided markets, app store owners represent the prototype of digital gatekeepers, controlling access to mobile ecosystems and competing with business users operating on the platforms. In light of the rule-setting and dual role of these gateway players, regulatory interventions are required in order to ensure that large app stores are treated like common carriers or public utilities, thereby imposing upon them a neutrality regime vis-à-vis new entrants. For the very same reasons, dominant app store providers have been subject to an increasing number of antitrust investigations attempting to ensure equal treatment and to avoid self-preferencing at the expense of rivals’ services. Against this background, the article investigates whether antitrust provisions are flexible enough to curb anti-competitive practices carried out by app stores and the extent to which regulatory interventions could, on the other hand, be necessary in order to address the seemingly unique features of the app economy.

Abstract

The current debate about antitrust divestitures has focused on how com­bining business units under the same corporate umbrella can allow digital platforms to favor their own services over those provided by third par­ties. To the extent that these debates have framed the issues in economic terms, they have overlooked the enduring importance of Conway’s Law and the Mirroring Hypothesis, which assert that a firm’s organizational structure must reflect the underlying technology of its products. These principles suggest that enforcement officials should not mandate the structural separation of an existing firm without taking into account the task interdependencies that determine the natural modular structure of a platform industry. Proper analysis of any proposed divestiture will also require antitrust law to shed the reluctance to engage in detailed balancing of technical considerations reflected in its technological tying precedents.

Read at SSRN.

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.

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.

Introduction

The dystopian novel is a powerful literary genre. It has given us such masterpieces as Nineteen Eighty-Four, Brave New World, Fahrenheit 451, and Animal Farm. Though these novels often shed light on some of the risks that contemporary society faces and the zeitgeist of the time when they were written, they almost always systematically overshoot the mark (whether intentionally or not) and severely underestimate the radical improvements commensurate with the technology (or other causes) that they fear. Nineteen Eighty-Four, for example, presciently saw in 1949 the coming ravages of communism, but it did not guess that markets would prevail, allowing us all to live freer and more comfortable lives than any preceding generation. Fahrenheit 451 accurately feared that books would lose their monopoly as the foremost medium of communication, but it completely missed the unparalleled access to knowledge that today’s generations enjoy. And while Animal Farm portrayed a metaphorical world where increasing inequality is inexorably linked to totalitarianism and immiseration, global poverty has reached historic lows in the twenty-first century, and this is likely also true of global inequality. In short, for all their literary merit, dystopian novels appear to be terrible predictors of the quality of future human existence. The fact that popular depictions of the future often take the shape of dystopias is more likely reflective of the genre’s entertainment value than of society’s impending demise.

But dystopias are not just a literary phenomenon; they are also a powerful force in policy circles. For example, in the early 1970s, the so-called Club of Rome published an influential report titled The Limits to Growth. The report argued that absent rapid and far-reaching policy shifts, the planet was on a clear path to self-destruction:

If the present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next one hundred years. The most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity.

Halfway through the authors’ 100-year timeline, however, available data suggests that their predictions were way off the mark. While the world’s economic growth has continued at a breakneck pace, extreme poverty, famine, and the depletion of natural resources have all decreased tremendously.

For all its inaccurate and misguided predictions, dire tracts such as The Limits to Growth perhaps deserve some of the credit for the environmental movements that followed. But taken at face value, the dystopian future along with the attendant policy demands put forward by works like The Limits to Growth would have had cataclysmic consequences for, apparently, extremely limited gain. The policy incentive is to strongly claim impending doom. There’s no incentive to suggest “all is well,” and little incentive even to offer realistic, caveated predictions.

As we argue in this Article, antitrust scholarship and commentary is also afflicted by dystopian thinking. Today, antitrust pessimists have set their sights predominantly on the digital economy—“big tech” and “big data”—alleging a vast array of potential harms. Scholars have argued that the data created and employed by the digital economy produces network effects that inevitably lead to tipping and more concentrated markets. In other words, firms will allegedly accumulate insurmountable data advantages and thus thwart competitors for extended periods of time. Some have gone so far as to argue that this threatens the very fabric of western democracy. Other commentators have voiced fears that companies may implement abusive privacy policies to shortchange consumers. It has also been said that the widespread adoption of pricing algorithms will almost inevitably lead to rampant price discrimination and algorithmic collusion. Indeed, “pollution” from data has even been likened to the environmental pollution that spawned The Limits to Growth: “If indeed ‘data are to this century what oil was to the last one,’ then—[it’s] argue[d]—data pollution is to our century what industrial pollution was to the last one.”

Some scholars have drawn explicit parallels between the emergence of the tech industry and famous dystopian novels. Professor Shoshana Zuboff, for instance, refers to today’s tech giants as “Big Other.” In an article called “Only You Can Prevent Dystopia,” one New York Times columnist surmised:

The new year is here, and online, the forecast calls for several seasons of hell. Tech giants and the media have scarcely figured out all that went wrong during the last presidential election—viral misinformation, state-sponsored propaganda, bots aplenty, all of us cleaved into our own tribal reality bubbles—yet here we go again, headlong into another experiment in digitally mediated democracy.

I’ll be honest with you: I’m terrified . . . There’s a good chance the internet will help break the world this year, and I’m not confident we have the tools to stop it.

Parallels between the novel Nineteen Eighty-Four and the power of large digital platforms were also plain to see when Epic Games launched an antitrust suit against Apple and its App Store in August 2020. Indeed, Epic Games released a short video clip parodying Apple’s famous “1984” ad (which upon its release was itself widely seen as a critique of the tech incumbents of the time).

Similarly, a piece in the New Statesman, titled “Slouching Towards Dystopia: The Rise of Surveillance Capitalism and the Death of Privacy,” concluded that: “Our lives and behaviour have been turned into profit for the Big Tech giants—and we meekly click ‘Accept.’ How did we sleepwalk into a world without privacy?”

Finally, a piece published in the online magazine Gizmodo asked a number of experts whether we are “already living in a tech dystopia.” Some of the responses were alarming, to say the least:

I’ve started thinking of some of our most promising tech, including machine learning, as like asbestos: … it’s really hard to account for, much less remove, once it’s in place; and it carries with it the possibility of deep injury both now and down the line.

. . . .

We live in a world saturated with technological surveillance, democracy-negating media, and technology companies that put themselves above the law while helping to spread hate and abuse all over the world.

Yet the most dystopian aspect of the current technology world may be that so many people actively promote these technologies as utopian.

Antitrust pessimism is not a new phenomenon, and antitrust enforcers and scholars have long been fascinated with—and skeptical of—high tech markets. From early interventions against the champions of the Second Industrial Revolution (oil, railways, steel, etc.) through the mid-twentieth century innovations such as telecommunications and early computing (most notably the RCA, IBM, and Bell Labs consent decrees in the US) to today’s technology giants, each wave of innovation has been met with a rapid response from antitrust authorities, copious intervention-minded scholarship, and waves of pessimistic press coverage. This is hardly surprising given that the adoption of antitrust statutes was in part a response to the emergence of those large corporations that came to dominate the Second Industrial Revolution (despite the numerous radical innovations that these firms introduced in the process). Especially for unilateral conduct issues, it has long been innovative firms that have drawn the lion’s share of cases, scholarly writings, and press coverage.

Underlying this pessimism is a pervasive assumption that new technologies will somehow undermine the competitiveness of markets, imperil innovation, and entrench dominant technology firms for decades to come. This is a form of antitrust dystopia. For its proponents, the future ushered in by digital platforms will be a bleak one—despite abundant evidence that information technology and competition in technology markets have played significant roles in the positive transformation of society. This tendency was highlighted by economist Ronald Coase:

[I]f an economist finds something—a business practice of one sort or another—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

“The fear of the new—and the assumption that ‘ununderstandable practices’ emerge from anticompetitive impulses and generate anticompetitive effects—permeates not only much antitrust scholarship, but antitrust doctrine as well.” While much antitrust doctrine is capable of accommodating novel conduct and innovative business practices, antitrust law—like all common law-based legal regimes—is inherently backward looking: it primarily evaluates novel arrangements with reference to existing or prior structures, contracts, and practices, often responding to any deviations with “inhospitality.” As a result, there is a built-in “nostalgia bias” throughout much of antitrust that casts a deeply skeptical eye upon novel conduct.

“The upshot is that antitrust scholarship often emphasizes the risks that new market realities create for competition, while idealizing the extent to which previous market realities led to procompetitive outcomes.” Against this backdrop, our Article argues that the current wave of antitrust pessimism is premised on particularly questionable assumptions about competition in data-intensive markets.

Part I lays out the theory and identifies the sources and likely magnitude of both the dystopia and nostalgia biases. Having examined various expressions of these two biases, the Article argues that their exponents ultimately seek to apply a precautionary principle within the field of antitrust enforcement, made most evident in critics’ calls for authorities to shift the burden of proof in a subset of proceedings.

Part II discusses how these arguments play out in the context of digital markets. It argues that economic forces may undermine many of the ills that allegedly plague these markets—and thus the case for implementing a form of precautionary antitrust enforcement. For instance, because data is ultimately just information, it will prove exceedingly difficult for firms to hoard data for extended periods of time. Instead, a more plausible risk is that firms will underinvest in the generation of data. Likewise, the main challenge for digital economy firms is not so much to obtain data, but to create valuable goods and hire talented engineers to draw insights from the data these goods generate. Recent empirical findings suggest, for example, that data economy firms don’t benefit as much as often claimed from data network effects or increasing returns to scale.

Part III reconsiders the United States v. Microsoft Corp. antitrust litigation—the most important precursor to today’s “big tech” antitrust enforcement efforts—and shows how it undermines, rather than supports, pessimistic antitrust thinking. It shows that many of the fears that were raised at the time didn’t transpire (for reasons unrelated to antitrust intervention). Rather, pessimists missed the emergence of key developments that greatly undermined Microsoft’s market position, and greatly overestimated Microsoft’s ability to thwart its competitors. Those circumstances—particularly revolving around the alleged “applications barrier to entry”—have uncanny analogues in the data markets of today. We thus explain how and why the Microsoft case should serve as a cautionary tale for current enforcers confronted with dystopian antitrust theories.

In short, the Article exposes a form of bias within the antitrust community. Unlike entrepreneurs, antitrust scholars and policy makers often lack the imagination to see how competition will emerge and enable entrants to overthrow seemingly untouchable incumbents. New technologies are particularly prone to this bias because there is a shorter history of competition to go on and thus less tangible evidence of attrition in these specific markets. The digital future is almost certainly far less bleak than many antitrust critics have suggested and yet the current swath of interventions aimed at reining in “big tech” presume. This does not mean that antitrust authorities should throw caution to the wind. Instead, policy makers should strive to maintain existing enforcement thresholds, which exclude interventions that are based solely on highly speculative theories of harm.

Read the full white paper here.

Abstract

A growing number of policymakers and scholars are calling for tougher rules to curb corporate acquisitions. But these appeals are premature. There is currently little evidence to suggest that mergers systematically harm consumer welfare. More importantly, scholars fail to identify alternative institutional arrangements that would capture the anticompetitive mergers that evade prosecution without disproportionate false positives and administrative costs. Their proposals thus fail to meet the requirements of the error-cost framework.

Several high-profile academic articles and reports claim to have identified important gaps in current merger enforcement rules, particularly with respect to tech and pharma acquisitions involving nascent and potential competitors—so-called “killer acquisitions” and “kill zones.” As a result of these perceived deficiencies, scholars and enforcers have called for tougher rules, including the introduction of lower merger filing thresholds and substantive changes, such as the inversion of the burden of proof when authorities review mergers and acquisitions in the digital platform industry. Meanwhile, and seemingly in response to the increased political and advocacy pressures around the issue, U.S. antitrust enforcers have recently undertaken several enforcement actions directly targeting such acquisitions.

As this paper discusses, however, these proposals tend to overlook the important tradeoffs that would ensue from attempts to decrease the number of false positives under existing merger rules and thresholds. While merger enforcement ought to be mindful of these possible theories of harm, the theories and evidence are not nearly as robust as many proponents suggest. Most importantly, there is insufficient basis to conclude that the costs of permitting the behavior they identify is greater than the costs would be of increasing enforcement to prohibit it.

Our work draws from two key strands of economic literature that are routinely overlooked (or summarily dismissed) by critics of the status quo. For a start, as Frank Easterbrook argued in his pioneering work on The Limits of Antitrust, antitrust enforcement is anything but costless. In the case of merger enforcement, not only is it expensive for agencies to detect anticompetitive deals, but overbearing rules may deter beneficial merger activity that creates value for consumers. Indeed, not only are most mergers welfare-enhancing, but barriers to merger activity have been shown to significantly, and negatively, affect early company investment.

Second, critics mistake the nature of causality. Scholars routinely surmise that incumbents use mergers to shield themselves from competition. Acquisitions are thus seen as a means of eliminating competition. But this overlooks an important alternative: It is at least plausible that incumbents’ superior managerial or other capabilities make them the ideal purchasers for entrepreneurs and startup investors who are looking to sell. This dynamic is likely to be amplified where the acquirer and acquiree operate in overlapping lines of business. In other words, competitive advantage, and the ability to profitably acquire other firms, might be caused by business acumen rather than anticompetitive behavior.

Thus, significant and high-profile M&A activity involving would-be competitors may be the procompetitive byproduct of a well-managed business, rather than anticompetitive efforts to stifle competition. Critics systematically overlook this possibility. Indeed, Henry Manne’s seminal work on Mergers and Market for Corporate Control—the first to argue that mergers are a means of applying superior management practices to new assets—is almost never cited by contemporary researchers in this space. Our paper attempts to set the record straight.

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Abstract

The New Madison Approach, championed by former Assistant Attorney General Makan Delrahim, sets forth a framework for understanding how antitrust law, patent law, and contract law intersect and interrelate in the field of technology standards. Commentators often conflate these divergent, but complementary, areas of law and seek to substitute one for the other, especially in disputes involving standard essential patents. In doing so, they often arrive at the conclusion that the puzzle is missing some pieces. By recognizing the work that each of these doctrines can and should do, the New Madison Approach solves the puzzle and presents an appealing picture of competition in the innovation age.

[This briefing paper was a joint publication of The Entrepreneurs Network and the International Center for Law & Economics.]

At the end of 2020, the UK government announced plans to create a Digital Markets Unit (DMU) charged with implementing an ex ante regulatory regime for certain digital platforms. Following the recommendations of the Digital Markets Taskforce, led by the Competition and Markets Authority (CMA), this DMU would serve as the de facto regulator of large tech companies that had been designated as having “strategic market status” (SMS). Accordingly, the DMU was formally established within the CMA in April 2021, although Parliament will need to legislate to give it the powers proposed by the Digital Markets Taskforce. That authorization is likely to come in 2022. Until then, the DMU will prepare draft codes of conduct, and potentially conduct further analysis to add more firms to its remit (so far, only Google and Facebook have been proposed as firms to be regulated, following the CMA’s Digital Advertising Market Study).

This announcement followed several official reviews claiming that some digital markets are not working properly because of the dominance of a few platforms. Based on these reports, the DMU would be given powers to designate dominant platforms as having “substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position”, which would lead to their being given the SMS designation. This would make platforms subject to a bespoke code of conduct, potential procompetitive interventions (PCIs), and increased scrutiny of their merger and product expansion decisions.

At first glance, none of these powers may appear novel. Codes of conduct have been used in other sectors, such as groceries and energy markets, and PCIs were part of the package of remedies in the CMA’s 2015 retail banking market review.

But these interventions were limited to a small number of clearly delineated sectors, firms, activities, or products. By contrast, the DMU’s remit will cover all “digital markets”. This is an already large and growing proportion of the UK economy that comprises many different activities, from digital advertising and e-commerce to online search, social media, and news publishing (among others). And it increasingly encompasses markets like taxis, groceries, entertainment, and other sectors that are becoming significantly “digitalised”. What may seem to be a focused mandate now is, over the coming decades, likely to grow to encompass more and more of the economy.

The DMU will thus combine the powers and operating structure of a narrow sector regulator with a cross-sector purview that is much closer to the CMA’s economy-wide reach. And it will do so for one of the most vitally important parts of the economy, where entrepreneurialism is central and where misguided regulation of incumbents may have systemic effects. The implications of this—creating a de facto regulator with goals that are often conflicting, with powers that lack many of the checks and balances that the CMA usually faces, and with a remit that could be as broad as the economy itself have been given little scrutiny so far, with some assuming the DMU’s scope is much narrower and more focused than it really is.

Proponents might view this level of ambition as fit for the challenge presented by digital markets, where strong competition is vital and where markets may naturally gravitate toward a small number of large competitors. And given the broad variety of activities undertaken by digital platforms and the rapidity of technological change, they may argue that an effective regulator needs both a broad remit and extensive powers to act quickly. But there are also clear costs and risks in creating such a powerful new agency, and these have not yet been widely appreciated by many with an interest in economic policy in Britain.

To get the measure of those costs and risks, this paper evaluates the challenges that the DMU will face as a novel regulator tackling firms with complex and highly differentiated business models, whose actions have distinct effects in several markets and startup ecosystems. It focuses on the structure and goals of the DMU, the first pillar of its powers—the codes of conduct it is expected to write and enforce—and the checks and balances that the CMA’s proposals lack. The other two pillars of its powers—procompetitive interventions and changes to the mergers regime—are just as important substantively, but require further consideration in a future paper. We do discuss one element of the mergers proposals below, however, given its importance to startups.

Section 1 sets out the main findings of several official reviews that preceded the announcement of the DMU.

Section 2 summarises the duty and powers that the Digital Markets Taskforce proposes to give to this new regulator.

Section 3 considers the problems of operationalising the DMU’s primary duty, given its vague objectives and different constituencies. Without a clear vision for what success looks like and how to manage the trade-offs involved, the DMU could easily become a hindrance to competition and innovation, instead of a positive force. The number of firms subject to SMS designation, and the consequent interventions, could steadily increase without improving consumer outcomes, because there would be no straightforward way to decide whether regulation worked.

Further, because the determinants of innovation for any given firm or in any given market are so poorly understood, the heightened scrutiny of SMS firms contemplated by the Digital Markets Taskforce’s recommendations could inadvertently chill innovation, both by SMS firms themselves, as well as by small firms and startups, whose venture capital may depend in part on their prospects of being acquired by an incumbent.

Moreover, in its current proposed form, the DMU could influence the activities of companies beyond those found to have market power. This could create major barriers to inter-platform competition — a key part of competition in platform markets, as platforms vie with each other to keep users within their ecosystem and attract new ones. And, if it makes it harder for smaller firms to be acquired, it could reduce both the founding of, and investment in startups in the UK.

Because SMS firms will only be able to contest designations and the associated interventions via judicial review, there is also a bias in favour of intervention built in to the DMU’s design. Lacking meaningful checks and balances, the DMU’s mistakes could go uncorrected for years, further weakening innovation, competition, and startup formation in the UK to the detriment of consumers and the British economy itself.

All of these could combine to create significant unseen costs for British consumers, which go ignored and uncorrected even as they worsen consumer welfare and weaken competition and innovation in the markets the DMU is supposed to be working to improve.

Section 4 evaluates the Taskforce’s proposed participative approach. We consider existing models of conduct-based regulation in the UK, finding that these precedents have generally had much narrower goals and remits than those of the DMU, and that they therefore constitute a poor template for the new regulator. Where existing conduct-based regulation has had a broader remit, such as with the Financial Conduct Authority, it has been criticised by firms as unclear and unpredictable and by other stakeholders as ineffective. We also consider in this section whether co-regulation—mixing statutory objectives with private governance—might best achieve the government’s purpose for the DMU, given the need to optimise across many different margins and the difficulty of doing so from the top.

Section 5 concludes with high-level recommendations to help ensure that the DMU actually serves to promote competition and innovation in UK digital markets. Before moving forward, the government should focus the DMU on the CMA’s core objective, which is to promote competition for the benefit of British consumers. And it should be clear that the codes of conduct it is charged with drafting and enforcing should be done only to promote competition, not to regulate the conduct of incumbents for the purpose of promoting other social goals that may conflict with the goal of promoting competition.

The government should also narrow the scope and extent of the DMU’s powers so that it promotes competition in the specific markets in which it has determined a firm has “strategic market status”, and does not grow into a bloated regulator of these companies’ other activities in competitive markets, or of the wider economy wherever “digitalisation” is taking place. The DMU should be genuinely participative, allowing stakeholders to actively assist in decision-making instead of just offering advice. It should give special consideration to startups, and to the effects of its behaviour on entrepreneurs’ and venture capitalists’ incentives to start and fund a business. Finally, it should allow for appeals on the merits to allow the DMU to be held accountable by courts for its decisions.

Read the full briefing paper here.