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We, the undersigned, are scholars from the International Center for Law & Economics (ICLE) with experience in the academy, enforcement agencies, and private practice in competition law. We write to address a key aspect of proposed amendments to Canadian competition law. Specifically, we focus on clauses in Bill C-59 pertinent to mergers and acquisitions and, in particular, the Bureau of Competition’s recommendation that the Bill should:

Amend Clauses 249-250 to enact rebuttable presumptions for mergers consistent with those set out in the U.S. Merger Guidelines.^[1]

The Bureau’s recommendation seeks to codify in Canadian competition law the structural presumptions outlined in the 2023 U.S. Federal Trade Commission (FTC) and U.S. Justice Department (DOJ) Merger Guidelines.  On balance, however, adoption of that recommendation would impede, rather than promote, fair competition and the welfare of Canadian consumers.

The cornerstone of the proposed change lies in the introduction of rebuttable presumptions of illegality for mergers that exceed specified market-share or concentration thresholds. While this approach may seem intuitive, the economic literature and U.S. enforcement experience militate against its adoption in Canadian law.

The goal of enhancing—indeed, strengthening—Canadian competition law should not be conflated with the adoption of foreign regulatory guidelines. The most recent U.S. Merger Guidelines establish new structural thresholds, based primarily on the Herfindahl-Hirschman Index (HHI) and market share, to establish presumptions of anticompetitive effects and illegality. Those structural presumptions, adopted a few short months ago, are inconsistent with established economic literature and are untested in U.S. courts. Those U.S. guidelines should not be codified in Canadian law without robust deliberation to ensure alignment with Canadian legal principles, on the one hand, and with economic realities and evidence, on the other.

Three points are especially important. First, concentration measures are widely considered to be a poor proxy for the level of competition that prevails in a given market. Second, lower merger thresholds may lead to enforcement errors that discourage investment and entrepreneurial activity and allocate enforcement resources to the wrong cases. Finally, these risks are particularly acute when concentration thresholds are used not as useful indicators but, instead, as actual legal presumptions (albeit rebuttable ones). We discuss each of these points in more detail below.

What Concentration Measures Can and Cannot Tell Us About Competition

While the use of concentration measures and thresholds can provide a useful preliminary-screening mechanism to identify potentially problematic mergers, substantially lowering the thresholds to establish a presumption of illegality is inadvisable for several reasons.

First, too strong a reliance on concentration measures lacks economic foundation and is likely prone to frequent error. Economists have been studying the relationship between concentration and various potential indicia of anticompetitive effects—price, markup, profits, rate of return, etc.—for decades.^[2] There are hundreds of empirical studies addressing this topic.^[3]

The assumption that “too much” concentration is harmful assumes both that the structure of a market is what determines economic outcomes and that anyone could know what the “right” amount of concentration is. But as economists have understood since at least the 1970s (and despite an extremely vigorous, but futile, effort to show otherwise), market structure does not determine outcomes.^[4]

This skepticism toward concentration measures as a guide for policy is well-supported, and is held by scholars across the political spectrum.  To take one prominent, recent example, professors Fiona Scott Morton (deputy assistant U.S. attorney general for economics in the DOJ Antitrust Division under President Barack Obama, now at Yale University); Martin Gaynor (former director of the FTC Bureau of Economics under President Obama, now serving as special advisor to Assistant U.S. Attorney General Jonathan Kanter, on leave from Carnegie Mellon University), and Steven Berry (an industrial-organization economist at Yale University) surveyed the industrial-organization literature and found that presumptions based on measures of concentration are unlikely to provide sound guidance for public policy:

In short, there is no well-defined “causal effect of concentration on price,” but rather a set of hypotheses that can explain observed correlations of the joint outcomes of price, measured markups, market share, and concentration.…

Our own view, based on the well-established mainstream wisdom in the field of industrial organization for several decades, is that regressions of market outcomes on measures of industry structure like the Herfindahl-Hirschman Index should be given little weight in policy debates.^[5]

As Chad Syverson recently summarized:

Perhaps the deepest conceptual problem with concentration as a measure of market power is that it is an outcome, not an immutable core determinant of how competitive an industry or market is… As a result, concentration is worse than just a noisy barometer of market power. Instead, we cannot even generally know which way the barometer is oriented.^[6]

This does not mean that concentration measures have no use in merger screening. Rather, market concentration is often unrelated to antitrust-enforcement goals because it is driven by factors that are endogenous to each industry. Enforcers should not rely too heavily on structural presumptions based on concentration measures, as these may be poor indicators of the instances in which antitrust enforcement is most beneficial to competition and consumers.

At What Level Should Thresholds Be Set?

Second, if concentration measures are to be used in some fashion, at what level or levels should they be set?

The U.S. 2010 Horizontal Merger Guidelines were “b?ased on updated HHI thresholds that more accurately reflect actual enforcement practice.”^[7] These numbers were updated in 2023, but without clear justification. While the U.S. enforcement authorities cite several old cases (cases that implicated considerably higher levels of concentration than those in their 2023 guidelines), we agree with comments submitted in 2022 by now-FTC Bureau of Economics Director Aviv Nevo and colleagues, who argued against such a change. They wrote:

Our view is that this would not be the most productive route for the agencies to pursue to successfully prevent harmful mergers, and could backfire by putting even further emphasis on market definition and structural presumptions.

If the agencies were to substantially change the presumption thresholds, they would also need to persuade courts that the new thresholds were at the right level. Is the evidence there to do so? The existing body of research on this question is, today, thin and mostly based on individual case studies in a handful of industries. Our reading of the literature is that it is not clear and persuasive enough, at this point in time, to support a substantially different threshold that will be applied across the board to all industries and market conditions. (emphasis added) ^[8]

Lower merger thresholds create several risks. One is that such thresholds will lead to excessive “false positives”; that is, too many presumptions against mergers that are likely to be procompetitive or benign. This is particularly likely to occur if enforcers make it harder for parties to rebut the presumptions, e.g., by requiring stronger evidence the higher the parties are above the (now-lowered) threshold. Raising barriers to establishing efficiencies and other countervailing factors makes it more likely that procompetitive mergers will be blocked. This not only risks depriving consumers of lower prices and greater innovation in specific cases, but chills beneficial merger-and-acquisition activity more broadly. The prospect of an overly stringent enforcement regime discourages investment and entrepreneurial activity. It also allocates scarce enforcement resources to the wrong cases.

Changing the Character of Structural Presumptions

Finally, the risks described above are particularly acute, given the change in the character of structural presumptions described in the U.S. Merger Guidelines. The 2023 Merger Guidelines—and only the 2023 Merger Guidelines—state that certain structural features of mergers will raise a “presumption of illegality.”^[9]

U.S. merger guidelines published in 1982,^[10] 1992 (revised in 1997),^[11] and 2010^[12] all describe structural thresholds seen by the agencies as pertinent to merger screening. None of them mention a “presumption of illegality.” In fact, as the U.S. agencies put it in the 2010 Horizontal Merger Guidelines:

The purpose of these thresholds is not to provide a rigid screen to separate competitively benign mergers from anticompetitive ones, although high levels of concentration do raise concerns. Rather, they provide one way to identify some mergers unlikely to raise competitive concerns and some others for which it is particularly important to examine whether other competitive factors confirm, reinforce, or counteract the potentially harmful effects of increased concentration.^[13]

The most worrisome category of mergers identified in the 1992 U.S. merger guidelines were said to be presumed “likely to create or enhance market power or facilitate its exercise.” The 1982 guidelines did not describe “presumptions” so much as that certain mergers that may be matters of “significant competitive concern” and “likely” to be subject to challenge.

Hence, earlier editions of the U.S. merger guidelines describe the ways that structural features of mergers might inform, but not determine, internal agency analysis of those mergers. That was useful information for industry, the bar, and the courts. Equally useful were descriptions of mergers that were “unlikely to have adverse competitive effects and ordinarily require no further analysis,”^[14] as well as intermediate types of mergers that “potentially raise significant competitive concerns and often warrant scrutiny.”^[15]

Similarly, the 1992 U.S. merger guidelines identified a tier of mergers deemed “unlikely to have adverse competitive effects and ordinarily require no further analysis,” as well as intermediate categories of mergers either unlikely to have anticompetitive effects or, in the alternative, potentially raising significant competitive concerns, depending on various factors described elsewhere in the guidelines.^[16]

By way of contrast, the new U.S. guidelines include no description of any mergers that are unlikely to have adverse competitive effects. And while the new merger guidelines do stipulate that the “presumption of illegality can be rebutted or disproved,” they offer very limited means of rebuttal.

This is at odds with prior U.S. agency practice and established U.S. law. Until very recently, U.S. agency staff sought to understand proposed mergers under the totality of their circumstances, much as U.S. courts came to do. Structural features of mergers (among many others) might raise concerns of greater or lesser degrees. These might lead to additional questions in some instances; more substantial inquiries under a “second request” in a minority of instances; or, eventually, a complaint against a very small minority of proposed mergers. In the alternative, they might help staff avoid wasting scarce resources on mergers “unlikely to have anticompetitive effects.”

Prior to a hearing or a trial on the merits, there might be strong, weak, or no appreciable assessments of likely liability, but there was no prima facie determination of illegality.

And while U.S. merger trials did tend to follow a burden-shifting framework for plaintiff and defendant production, they too looked to the “totality of the circumstances”^[17] and a transaction’s “probable effect on future competition”^[18] to determine liability, and they looked away from strong structural presumptions. As then-U.S. Circuit Judge Clarence Thomas observed in the Baker-Hughes case:

General Dynamics began a line of decisions differing markedly in emphasis from the Court’s antitrust cases of the 1960s. Instead of accepting a firm’s market share as virtually conclusive proof of its market power, the Court carefully analyzed defendants’ rebuttal evidence.^[19]

Central to the holding in Baker Hughes—and contra the 2023 U.S. merger guidelines—was that, because the government’s prima facie burden of production was low, the defendant’s rebuttal burden should not be unduly onerous.^[20] As the U.S. Supreme Court had put it, defendants would not be required to clearly disprove anticompetitive effects, but rather, simply to “show that the concentration ratios, which can be unreliable indicators of actual market behavior . . . did not accurately depict the economic characteristics of the [relevant] market.”^[21]

Doing so would not end the matter. Rather, “the burden of producing additional evidence of anticompetitive effects shifts to the government, and merges with the ultimate burden of persuasion, which remains with the government at all times.”^[22]

As the U.S. Supreme Court decision in Marine Bancorporation underscores, even by 1974, it was well understood that concentration ratios “can be unreliable indicators” of market behavior and competitive effects.

As explained above, research and enforcement over the ensuing decades have undermined reliance on structural presumptions even further. As a consequence, the structure/conduct/performance paradigm has been largely abandoned, because it’s widely recognized that market structure is not outcome–determinative.

That is not to say that high concentration cannot have any signaling value in preliminary agency screening of merger matters. But concentration metrics that have proven to be unreliable indicators of firm behavior and competitive effects should not be enshrined in Canadian statutory law. That would be a step back, not a step forward, for merger enforcement.

 

^[1] Matthew Boswell, Letter to the Chair and Members of the House of Commons Standing Committee on Finance, Competition Bureau Canada (Mar. 1, 2024), available at https://sencanada.ca/Content/Sen/Committee/441/NFFN/briefs/SM-C-59_CompetitionBureauofCND_e.pdf.

^[2] For a few examples from a very large body of literature, see, e.g., Steven Berry, Martin Gaynor, & Fiona Scott Morton, Do Increasing Markups Matter? Lessons from Empirical Industrial Organization, 33J. Econ. Perspectives 44 (2019); Richard Schmalensee, Inter-Industry Studies of Structure and Performance, in 2 Handbook of Industrial Organization 951-1009 (Richard Schmalensee & Robert Willig, eds., 1989); William N. Evans, Luke M. Froeb, & Gregory J. Werden, Endogeneity in the Concentration-Price Relationship: Causes, Consequences, and Cures, 41 J. Indus. Econ. 431 (1993); Steven Berry, Market Structure and Competition, Redux, FTC Micro Conference (Nov. 2017), available at https://www.ftc.gov/system/files/documents/public_events/1208143/22_-_steven_berry_keynote.pdf; Nathan Miller, et al., On the Misuse of Regressions of Price on the HHI in Merger Review, 10 J. Antitrust Enforcement 248 (2022).

^[3] Id.

^[4] See Harold Demsetz, Industry Structure, Market Rivalry, and Public Policy, 16 J. L. & Econ. 1 (1973).

^[5] Berry, Gaynor, & Scott Morton, supra note 2.

^[6] Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions 33 J. Econ. Persp. 23, (2019) at 26.

^[7] Joseph Farrell & Carl Shapiro, The 2010 Horizontal Merger Guidelines After 10 Years, 58 REV. IND. ORG. 58, (2021). https://link.springer.com/article/10.1007/s11151-020-09807-6.

^[8] John Asker et al, Comments on the January 2022 DOJ and FTC RFI on Merger Enforcement (Apr. 20, 2022), available at https://www.regulations.gov/comment/FTC-2022-0003-1847 at 15-6.

^[9] U.S. Dep’t Justice & Fed. Trade Comm’n, Merger Guidelines (Guideline One) (Dec. 18, 2023), available at https://www.ftc.gov/system/files/ftc_gov/pdf/2023_merger_guidelines_final_12.18.2023.pdf.

^[10] U.S. Dep’t Justice, 1982 Merger Guidelines (1982), https://www.justice.gov/archives/atr/1982-merger-guidelines.

^[11] U.S. Dep’t Justice & Fed. Trade Comm’n, 1992 Merger Guidelines (1992), https://www.justice.gov/archives/atr/1992-merger-guidelines; U.S. Dep’t Justice & Fed. Trade Comm’n, 1997 Merger Guidelines (1997), https://www.justice.gov/archives/atr/1997-merger-guidelines.

^[12] U.S. Dep’t Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (Aug. 19, 2010), https://www.justice.gov/atr/horizontal-merger-guidelines-08192010; The U.S. antitrust agencies also issued Vertical Merger Guidelines in 2020. Although these were formally withdrawn in 2021 by the FTC, but not DOJ, they too are supplanted by the 2023 Merger Guidelines. See U.S. Dep’t Justice & Fed. Trade Comm’n, Vertical Merger Guidelines (Jun. 30, 2020), available at https://www.ftc.gov/system/files/documents/public_statements/1580003/vertical_merger_guidelines_6-30-20.pdf.

^[13] 2010 Horizontal Merger Guidelines.

^[14] Id.

^[15] Id.

^[16] 1992 Merger Guidelines.

^[17]  United States v. Baker-Hughes Inc., 908 F.2d 981, 984 (D.C. Cir. 1990).

^[18] Id. at 991.

^[19] Id. at 990 (citing Hospital Corp. of Am. v. FTC, 807 F.2d 1381, 1386 (7th Cir.1986), cert. denied, 481 U.S. 1038, 107 S.Ct. 1975, 95 L.Ed.2d 815 (1987).

^[20]  Id. at 987, 992.

^[21]  United States v. Marine Bancorporation Inc., 418 U.S. 602, 631 (1974) (internal citations omitted).

^[22]  Baker-Hughes, 908 F.2d at 983.

Abstract

Physician non-compete agreements may have significant competitive implications, and effects on both providers and patients, but they are treated variously under the law on a state-by-state basis. Reviewing the relevant law and the economic literature cannot identify with confidence the net effects of such agreements on either physicians or health care delivery with any generality. In addition to identifying future research projects to inform policy, it is argued that the antitrust “rule of reason” provides a useful and established framework with which to evaluate such agreements in specific health care markets and, potentially, to address those agreements most likely to do significant damage to health care competition and consumers.

Abstract

Sherlocking refers to an online platform’s use of nonpublic third-party business data to improve its own business decisions—for instance, by mimicking the successful products and services of edge providers. Such a strategy emerges as a form of self-preferencing and, as with other theories about preferential access to data, it has been targeted by some policymakers and competition authorities due to the perceived competitive risks originating from the dual role played by hybrid platforms (acting as both referees governing their platforms, and players competing with the business they host). This paper investigates the competitive implications of sherlocking, maintaining that an outright ban is unjustified. First, the paper shows that, by aiming to ensure platform neutrality, such a prohibition would cover scenarios (i.e., the use of nonpublic third-party business data to calibrate business decisions in general, rather than to adopt a pure copycat strategy) that should be analyzed separately. Indeed, in these scenarios, sherlocking may affect different forms of competition (inter-platform v. intra-platform competition). Second, the paper argues that, in either case, the practice’s anticompetitive effects are questionable and that the ban is fundamentally driven by a bias against hybrid and vertically integrated players.

I. Introduction

The dual role some large digital platforms play (as both intermediary and trader) has gained prominence among the economic arguments used to justify the recent wave of regulation hitting digital markets around the world. Many policymakers have expressed concern about potential conflicts of interest among companies that have adopted this hybrid model and that also control important gateways for business users. In other words, the argument goes, some online firms act not only as regulators who set their platforms’ rules and as referees who enforce those rules, but also as market players who compete with their business users. This raises the fear that large platforms could reserve preferential treatment for their own services and products, to the detriment of downstream rivals and consumers. That, in turn, has led to calls for platform-neutrality rules.

Toward this aim, essentially all of the legislative initiatives undertaken around the world in recent years to enhance competition in digital markets have included anti-discrimination provisions that target various forms of self-preferencing. Self-preferencing, it has been said, serves as the symbol of the current competition-policy zeitgeist in digital markets.[1] Indeed, this conduct is considered functional to leveraging strategies that would grant gatekeepers the chance to entrench their power in core markets and extend it into associated markets.[2]

Against this background, so-called “sherlocking” has emerged as one form of self-preferencing. The term was coined roughly 20 years ago, after Apple updated its own app Sherlock (a search tool on its desktop-operating system) to mimic a third-party application called Watson, which was created by Karelia Software to complement the Apple tool’s earlier version.[3] According to critics of self-preferencing generally and sherlocking in particular, biased intermediation and related conflicts of interest allow gatekeepers to exploit their preferential access to business users’ data to compete against them by replicating successful products and services. The implied assumption is that this strategy is relevant to competition policy, even where no potential intellectual-property rights (IPRs) are infringed and no slavish imitation sanctionable under unfair-competition laws is detected. Indeed, under such theories, sherlocking would already be prevented by the enforcement of these rules.

To tackle perceived misuse of gatekeepers’ market position, the European Union’s Digital Markets Act (DMA) introduced a ban on sherlocking.[4] Similar concerns have also motivated requests for intervention in the United States,[5] Australia,[6] and Japan.[7] In seeking to address at least two different theories of gatekeepers’ alleged conflicts of interest, these proposed bans on exploiting access to business users’ data are not necessarily limited to the risk of product imitation, but may include any business decision whatsoever that a platform may make while relying on that data.

In parallel with the regulatory initiatives, the conduct at-issue has also been investigated in some antitrust proceedings, which appear to seek the very same twofold goal. In particular, in November 2020, the European Commission sent a statement of objections to Amazon that argued the company had infringed antitrust rules through the systematic use of nonpublic business data from independent retailers who sell on the Amazon online marketplace in order to benefit Amazon’s own retail business, which directly competes with those retailers.[8] A similar investigation was opened by the UK Competition and Markets Authority (CMA) in July 2022.[9]

Further, as part of the investigation opened into Apple’s App Store rule requiring developers to use Apple’s in-app purchase mechanism to distribute paid apps and/or paid digital content, the European Commission also showed interest in evaluating whether Apple’s conduct might disintermediate competing developers from relevant customer data, while Apple obtained valuable data about those activities and its competitors’ offers.[10] The European Commission and UK CMA likewise launched an investigation into Facebook Marketplace, with accusations that Meta used data gathered from advertisers in order to compete with them in markets where the company is active, such as classified ads.[11]

There are two primary reasons these antitrust proceedings are relevant. First, many of the prohibitions envisaged in regulatory interventions (e.g., DMA) clearly took inspiration from the antitrust investigations, thus making it important to explore the insights that competition authorities may provide to support an outright ban. Second, given that regulatory intervention will be implemented alongside competition rules (especially in Europe) rather than displace them,[12] sherlocking can be assessed at both the EU and national level against dominant players that are not eligible for “gatekeeper” designation under the DMA. For those non-gatekeeper firms, the practice may still be investigated by antitrust authorities and assessed before courts, aside from the DMA’s per se prohibition. And, of course, investigations and assessments of sherlocking could also be made even in those jurisdictions where there isn’t an outright ban.

The former sis well-illustrated by the German legislature’s decision to empower its national competition authority with a new tool to tackle abusive practices that are similar and functionally equivalent to the DMA.[13] Indeed, as of January 2021, the Bundeskartellamt may identify positions of particular market relevance (undertakings of “paramount significance for competition across markets”) and assess their possible anticompetitive effects on competition in those areas of digital ecosystems in which individual companies may have a gatekeeper function. Both the initiative’s aims and its list of practices are similar to the DMA. They are distinguished primarily by the fact that the German list is exhaustive, and the practices at-issue are not prohibited per se, but are subject to a reversal of the burden of proof, allowing firms to provide objective justifications. For the sake of this analysis, within the German list, one provision prohibits designated undertakings from “demanding terms and conditions that permit … processing data relevant for competition received from other undertakings for purposes other than those necessary for the provision of its own services to these undertakings without giving these undertakings sufficient choice as to whether, how and for what purpose such data are processed.”[14]

Unfortunately, none of the above-mentioned EU antitrust proceedings have concluded with a final decision that addresses the merits of sherlocking. This precludes evaluating whether the practice would have survived before the courts. Regarding the Apple investigation, the European Commission dropped the case over App Store rules and issued a new statement of objections that no longer mentions sherlocking.[15] Further, the European Commission and the UK CMA accepted the commitments offered by Amazon to close those investigations.[16] The CMA likewise accepted the commitments offered by Meta.[17]

Those outcomes can be explained by the DMA’s recent entry into force. Indeed, because of the need to comply with the new regulation, players designated as gatekeepers likely have lost interest in challenging antitrust investigations that target the very same conduct prohibited by the DMA.[18] After all, given that the DMA does not allow any efficiency defense against the listed prohibitions, even a successful appeal against an antitrust decision would be a pyrrhic victory. From the opposite perspective, the same applies to the European Commission, which may decide to save time, costs, and risks by dropping an ongoing case against a company designated as a gatekeeper under the DMA, knowing that the conduct under investigation will be prohibited in any case.

Nonetheless, despite the lack of any final decision on sherlocking, these antitrust assessments remain relevant. As already mentioned, the DMA does not displace competition law and, in any case, dominant platforms not designated as gatekeepers under the DMA still may face antitrust investigations over sherlocking. This applies even more for jurisdictions, such as the United States, that are evaluating DMA-like legislative initiatives (e.g., the American Innovation and Choice Online Act, or “AICOA”).

Against this background, drawing on recent EU cases, this paper questions the alleged anticompetitive implications of sherlocking, as well as claims that the practice fails to comply with existing antitrust rules.

First, the paper illustrates that prohibitions on the use of nonpublic third-party business data would cover two different theories that should be analyzed separately. Whereas a broader case involves all the business decisions adopted by a dominant platform because of such preferential access (e.g., the launch of new products or services, the development or cessation of existing products or services, the calibration of pricing and management systems), a more specific case deals solely with the adoption of a copycat strategy. By conflating these theories in support of a blanket ban that condemns any use of nonpublic third-party business data, EU antitrust authorities are fundamentally motivated by the same policy goal pursued by the DMA—i.e., to impose a neutrality regime on large online platforms. The competitive implications differ significantly, however, as adopting copycat strategies may only affect intra-brand competition, while using said data to improve other business decisions could also affect inter-platform competition.

Second, the paper shows that, in both of these scenarios, the welfare effects of sherlocking are unclear. Notably, exploiting certain data to better understand the market could help a platform to develop new products and services, to improve existing products and services, or more generally to be more competitive with respect to both business users and other platforms. As such outcomes would benefit consumers in terms of price and quality, any competitive advantage achieved by the hybrid platform could be considered unlawful only if it is not achieved on the merits. In a similar vein, if sherlocking is used by a hybrid platform to deliver replicas of its business users’ products and services, that would likely provide short-term procompetitive effects benefitting consumers with more choice and lower prices. In this case, the only competitive harm that would justify an antitrust intervention resides in (uncertain) negative long-term effects on innovation.

As a result, in any case, an outright ban of sherlocking, such as is enshrined in the DMA, is economically unsound since it would clearly harm consumers.

The paper is structured as follows. Section II describes the recent antitrust investigations of sherlocking, illustrating the various scenarios that might include the use of third-party business data. Section III investigates whether sherlocking may be considered outside the scope of competition on the merits for bringing competitive advantages to platforms solely because of their hybrid business model. Section IV analyzes sherlocking as a copycat strategy by investigating the ambiguous welfare effects of copying in digital markets and providing an antitrust assessment of the practice at issue. Section V concludes.

II. Antitrust Proceedings on Sherlocking: Platform Neutrality and Copycat Competition

Policymakers’ interest in sherlocking is part of a larger debate over potentially unfair strategies that large online platforms may deploy because of their dual role as an unavoidable trading partner for business users and a rival in complementary markets.

In this scenario, as summarized in Table 1, the DMA outlaws sherlocking, establishing that to “prevent gatekeepers from unfairly benefitting from their dual role,”[19] they are restrained from using, in competition with business users, “any data that is not publicly available that is generated or provided by those business users in the context of their use of the relevant core platform services or of the services provided together with, or in support of, the relevant core platform services, including data generated or provided by the customers of those business users.”[20] Recital 46 further clarifies that the “obligation should apply to the gatekeeper as a whole, including but not limited to its business unit that competes with the business users of a core platform service.”

A similar provision was included in the American Innovation and Choice Online Act (AICOA), which was considered, but not ultimately adopted, in the 117^th U.S. Congress. AICOA, however, would limit the scope of the ban to the offer of products or services that would compete with those offered by business users.[21] Concerns about copycat strategies were also reported in the U.S. House of Representatives’ investigation of the state of competition in digital markets as supporting the request for structural-separation remedies and line-of-business restrictions to eliminate conflicts of interest where a dominant intermediary enters markets that place it in competition with dependent businesses.[22] Interestingly, however, in the recent complaint filed by the U.S. Federal Trade Commission (FTC) and 17 state attorneys general against Amazon that accuses the company of having deployed an interconnected strategy to block off every major avenue of competition (including price, product selection, quality, and innovation), there is no mention of sherlocking among the numerous unfair practices under investigation.[23]

Evaluating regulatory-reform proposals for digital markets, the Australian Competition and Consumer Commission (ACCC) also highlighted the risk of sherlocking, arguing that it could have an adverse effect on competition, notably on rivals’ ability to compete, when digital platforms exercise their strong market position to utilize nonpublic data to free ride on the innovation efforts of their rivals.[24] Therefore, the ACCC suggested adopting service-specific codes to address self-preferencing by, for instance, imposing data-separation requirements to restrain dominant app-store providers from using commercially sensitive data collected from the app-review process to develop their own apps.[25]

Finally, on a comparative note, it is also useful to mention the proposals advanced by the Japanese Fair Trade Commission (JFTC) in its recent market-study report on mobile ecosystems.[26] In order to ensure equal footing among competitors, the JFTC specified that its suggestion to prevent Google and Apple from using nonpublic data generated by other developers’ apps aims at pursuing two purposes. Such a ban would, indeed, concern not only use of the data for the purpose of developing competing apps, products, and services, but also its use for developing their own apps, products, and services.

TABLE 1: Legislative Initiatives and Proposals to Ban Sherlocking

As previously anticipated, sherlocking recently emerged as an antitrust offense in three investigations launched by the European Commission and the UK CMA.

In the first case, Amazon’s alleged reliance on marketplace sellers’ nonpublic business data has been claimed to distort fair competition on its platform and prevent effective competition. In its preliminary findings, the Commission argued that Amazon takes advantage of its hybrid business model, leveraging its access to nonpublic third-party sellers’ data (e.g., the number of ordered and shipped units of products; sellers’ revenues on the marketplace; the number of visits to sellers’ offers; data relating to shipping, to sellers’ past performance, and to other consumer claims on products, including the activated guarantees) to adjust its retail offers and strategic business decisions to the detriment of third-party sellers, which are direct competitors on the marketplace.[27] In particular, the Commission was concerned that Amazon uses such data for its decision to start and end sales of a product, for its pricing system, for its inventory-planning and management system, and to identify third-party sellers that Amazon’s vendor-recruitment teams should approach to invite them to become direct suppliers to Amazon Retail. To address the data-use concern, Amazon committed not to use nonpublic data relating to, or derived from, independent sellers’ activities on its marketplace for its retail business and not to use such data for the purposes of selling branded goods, as well as its private-label products.[28]

A parallel investigation ended with similar commitments in the UK.[29] According to the UK CMA, Amazon’s access to and use of nonpublic seller data could result in a competitive advantage for Amazon Retail arising from its operation of the marketplace, rather than from competition on the merits, and may lead to relevant adverse effects on competition. Notably, it was alleged this could result in a reduction in the scale and competitiveness of third-party sellers on the Amazon Marketplace; a reduction in the number and range of product offers from third-party sellers on the Amazon Marketplace; and/or less choice for consumers, due to them being offered lower quality goods and/or paying higher prices than would otherwise be the case.

It is also worth mentioning that, by determining that Amazon is an undertaking of paramount significance for competition across markets, the Bundeskartellamt emphasized the competitive advantage deriving from Amazon’s access to nonpublic data, such as Glance Views, sales figures, sale quantities, cost components of products, and reorder status.[30] Among other things, with particular regard to Amazon’s hybrid role, the Bundeskartellamt noted that the preferential access to competitively sensitive data “opens up the possibility for Amazon to optimize its own-brand assortment.”[31]

A second investigation involved Apple and its App Store rule.[32] According to the European Commission, the mandatory use of Apple’s own proprietary in-app purchase system (IAP) would, among other things, grant Apple full control over the relationship its competitors have with customers, thus disintermediating those competitors from customer data and allowing Apple to obtain valuable data about the activities and offers of its competitors.

Finally, Meta faced antitrust proceedings in both the EU and the UK.[33] The focus was on Facebook Marketplace—i.e., an online classified-ads service that allows users to advertise goods for sale. According to the European Commission and the CMA, Meta unilaterally imposes unfair trading conditions on competing online-classified ads services that advertise on Facebook or Instagram. These terms and conditions, which authorize Meta to use ads-related data derived from competitors for the benefit of Facebook Marketplace, are considered unjustified, as they impose an unnecessary burden on competitors and only benefit Facebook Marketplace. The suspicion is that Meta has used advertising data from Facebook Marketplace competitors for the strategic planning, product development, and launch of Facebook Marketplace, as well as for Marketplace’s operation and improvement.

Overall, these investigations share many features. The concerns about third-party business-data use, as well as about other forms of self-preferencing, revolve around the competitive advantages that accrue to a dominant platform because of its dual role. Such advantages are considered unfair, as they are not the result of the merits of a player, but derived purely and simply from its role as an important gateway to reach end users. Moreover, this access to valuable business data is not reciprocal. The feared risk is the marginalization of business users competing with gatekeepers on the gatekeepers’ platforms and, hence, the alleged harm to competition is the foreclosure of rivals in complementary markets (horizontal foreclosure).

The focus of these investigations was well-illustrated by the European Commission’s decision on Amazon’s practice.[34] The Commission’s concern was about the “data delta” that Amazon may exploit, namely the additional data related to third-party sellers’ listings and transactions that are not available to, and cannot be replicated by, the third-party sellers themselves, but are available to and used by Amazon Retail for its own retail operations.[35] Contrary to Amazon Retail—which, according to Commission’s allegations, would have full access to and would use such individual, real-time data of all its third-party sellers to calibrate its own retail decisions—sellers would have access only to their own individual listings and sales data. As a result, the Commission came to the (preliminary) conclusion that real-time access to and use of such volume, variety, and granularity of non-publicly available data from its retail competitors generates a significant competitive advantage for Amazon Retail in each of the different decisional processes that drive its retail operations.[36]

On a closer look, however, while antitrust authorities seem to target the use of nonpublic third-party business data as a single theory of harm, their allegations cover two different scenarios along the lines of what has already been examined with reference to the international legislative initiatives and proposals. Indeed, the Facebook Marketplace case does not involve an allegation of copying, as Meta is accused of gathering data from its business users to launch and improve its ads service, instead of reselling goods and services.

FIGURE 1: Sherlocking in Digital Markets

As illustrated above in Figure 1, while the claim in the latter scenario is that the preferential data use would help dominant players calibrate business decisions in general, the former scenario instead involves the use of such data for a pure copycat strategy of an entire product or service, or some of its specific features.

In both scenarios the aim of the investigations is to ensure platform neutrality. Accordingly, as shown by the accepted commitments, the envisaged solution for antitrust authorities is to impose  data-separation requirements to restrain dominant platforms from using third-party commercially sensitive data. Putting aside that these investigations concluded with commitments from the firms, however, their chances of success before a court differ significantly depending on whether they challenge a product-imitation strategy, or any business decision adopted because of the “data delta.”

A. Sherlocking and Unconventional Theories of Harm for Digital Markets

Before analyzing how existing competition-law rules could be applied to the various scenarios involving the use of third-party business data, it is worth providing a brief overview of the framework in which the assessment of sherlocking is conducted. As competition in the digital economy is increasingly a competition among ecosystems,[37] a lively debate has emerged on the capacity of traditional antitrust analysis to adequately capture the peculiar features of digital markets. Indeed, the combination of strong economies of scale and scope; indirect network effects; data advantages and synergies across markets; and portfolio effects all facilitate ecosystem development all contribute to making digital markets highly concentrated, prone to tipping, and not easily contestable.[38] As a consequence, it’s been suggested that addressing these distinctive features of digital markets requires an overhaul of the antitrust regime.

Such discussions require the antitrust toolkit and theories of harm to illustrate whether and how a particular practice, agreement, or merger is anticompetitive. Notably, at issue is whether traditional antitrust theories of harm are fit for purpose or whether novel theories of harm should be developed in response to the emerging digital ecosystems. The latter requires looking at the competitive impact of expanding, protecting, or strengthening an ecosystem’s position, and particularly whether such expansion serves to exploit a network of capabilities and to control access to key inputs and components.[39]

A significant portion of recent discussions around developing novel theories of harm to better address the characteristics of digital-business models and markets has been devoted to the topic of merger control—in part a result of the impressive number of acquisitions observed in recent years.[40] In particular, the focus has been on analyzing conglomerate mergers that involve acquiring a complementary or unrelated asset, which have traditionally been assumed to raise less-significant competition concerns.

In this regard, an ecosystem-based theory seems to have guided the Bundeskartellamt in its assessment of Meta’s acquisition of Kustomer[41] and by the CMA in Microsoft/Activision.[42] A more recent example is the European Commission’s decision to prohibit the proposed Booking/eTraveli merger, where the Commission explicitly noted that the transaction would have allowed Booking to expand its travel-services ecosystem.[43] The Commission’s concerns were related primarily to the so-called “envelopment” strategy, in which a prominent platform within a specific market broadens its range of services into other markets where there is a significant overlap of customer groups already served by the platform.[44]

Against this background, putative self-preferencing harms represent one of the European Commission’s primary (albeit contentious)[45] attempts to develop new theories of harm built on conglomerate platforms’ ability to bundle services or use data from one market segment to inform product development in another.[46] Originally formulated in the Google Shopping decision,[47] the theory of harm of (leveraging through) self-preferencing has subsequently inspired the DMA, which targets different forms of preferential treatment, including sherlocking.

In particular, it is asserting that platform may use self-preferencing to adopt a leveraging strategy with a twofold anticompetitive effect—that is, excluding or impeding rivals from competing with the platform (defensive leveraging) and extending the platform’s market power into associated markets (offensive leveraging). These goals can be pursued because of the unique role that some large digital platforms play. That is, they not only enjoy strategic market status by controlling ecosystems of integrated complementary products and services, which are crucial gateways for business users to reach end users, but they also perform a dual role as both a critical intermediary and a player active in complementors’ markets. Therefore, conflicts of interests may provide incentives for large vertically integrated platforms to favor their own products and services over those of their competitors.[48]

The Google Shopping theory of harm, while not yet validated by the Court of Justice of the European Union (CJEU),[49] has also found its way into merger analysis, as demonstrated by the European Commission’s recent assessment of iRobot/Amazon.[50] In its statement of objections, the Commission argued that the proposed acquisition of iRobot may give Amazon the ability and incentive to foreclose iRobot’s rivals by engaging in several foreclosing strategies to prevent them from selling robot vacuum cleaners (RVCs) on Amazon’s online marketplace and/or at degrading such rivals’ access to that marketplace. In particular, the Commission found that Amazon could deploy such self-preferencing strategies as delisting rival RVCs; reducing rival RVCs’ visibility in both organic and paid results displayed in Amazon’s marketplace; limiting access to certain widgets or commercially attractive labels; and/or raising the costs of iRobot’s rivals to advertise and sell their RVCs on Amazon’s marketplace.[51]

Sherlocking belongs to this framework of analysis and can be considered a form of self-preferencing, specifically because of the lack of reciprocity in accessing sensitive data.[52] Indeed, while gatekeeper platforms have access to relevant nonpublic third-party business data as a result of their role as unavoidable trading partners, they leverage this information exclusively, without sharing it with third-party sellers, thus further exacerbating an already uneven playing field.[53]

III. Sherlocking for Competitive Advantage: Hybrid Business Model, Neutrality Regimes, and Competition on the Merits

Insofar as prohibitions of sherlocking center on the competitive advantages that platforms enjoy because of their dual role—thereby allowing some players to better calibrate their business decisions due to their preferential access to business users’ data—it should be noted that competition law does not impose a general duty to ensure a level playing field.[54] Further, a competitive advantage does not, in itself, amount to anticompetitive foreclosure under antitrust rules. Rather, foreclosure must not only be proved (in terms of actual or potential effects) but also assessed against potential benefits for consumers in terms of price, quality, and choice of new goods and services.[55]

Indeed, not every exclusionary effect is necessarily detrimental to competition.[56] Competition on the merits may, by definition, lead to the departure from the market or the marginalization of competitors that are less efficient and therefore less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation.[57] Automatically classifying any conduct with exclusionary effects were as anticompetitive could well become a means to protect less-capable, less-efficient undertakings and would in no way protect more meritorious undertakings—thereby potentially hindering a market’s competitiveness.[58]

As recently clarified by the CJEU regarding the meaning of “competition on the merits,” any practice that, in its implementation, holds no economic interest for a dominant undertaking except that of eliminating competitors must be regarded as outside the scope of competition on the merits.[59] Referring to the cases of margin squeezes and essential facilities, the CJEU added that the same applies to practices that a hypothetical equally efficient competitor is unable to adopt because that practice relies on using resources or means inherent to the holding of such a dominant position.[60]

Therefore, while antitrust cases on sherlocking set out to ensure a level playing field and platform neutrality, and therefore center on the competitive advantages that a platform enjoys because of its dual role, mere implementing a hybrid business model does not automatically put such practices outside the scope of competition on the merits. The only exception, according to the interpretation provided in Bronner, is the presence of an essential facility—i.e., an input whose access should be considered indispensable, as there are no technical, legal, or economic obstacles capable of making it impossible, or even unreasonably difficult, to duplicate it.[61]

As a result, unless it is proved that the hybrid platform is an essential facility, sherlocking and other forms of self-preferencing cannot be considered prima facie outside the scope of competition on the merits, or otherwise unlawful. Rather, any assessment of sherlocking demands the demonstration of anticompetitive effects, which in turn requires finding an impact on efficient firms’ ability and incentive to compete. In the scenario at-issue, for instance, the access to certain data may allow a platform to deliver new products or services; to improve existing products or services; or more generally to compete more efficiently not only with respect to the platform’s business users, but also against other platforms. Such an increase in both intra-platform and inter-platform competition would benefit consumers in terms of lower prices, better quality, and a wider choice of new or improved goods and services—i.e., competition on the merits.[62]

In Facebook Marketplace, the European Commission and UK CMA challenged the terms and conditions governing the provision of display-advertising and business-tool services to which Meta required its business customers to sign up.[63] In their view, Meta abused its dominant position by imposing unfair trading conditions on its advertising customers, which authorized Meta to use ads-related data derived from the latter in a way that could afford Meta a competitive advantage on Facebook Marketplace that would not have arisen from competition on the merits. Notably, antitrust authorities argued that Meta’s terms and conditions were unjustified, disproportionate, and unnecessary to provide online display-advertising services on Meta’s platforms.

Therefore, rather than directly questioning the platform’s dual role or hybrid business model, the European Commission and UK CMA decided to rely on traditional case law which considers unfair those clauses that are unjustifiably unrelated to the purpose of the contract, unnecessarily limit the parties’ freedom, are disproportionate, or are unilaterally imposed or seriously opaque.[64] This demonstrates that, outside the harm theory of the unfairness of terms and conditions, a hybrid platform’s use of nonpublic third-party business data to improve its own business decisions is generally consistent with antitrust provisions. Hence, an outright ban would be unjustified.

IV. Sherlocking to Mimic Business Users’ Products or Services

The second, and more intriguing, sherlocking scenario is illustrated by the Amazon Marketplace investigations and regards the original meaning of sherlocking—i.e., where a data advantage is used by a hybrid platform to mimic its business users’ products or services.

Where sherlocking charges assert that the practice allows some platforms to use business users’ data to compete against them by replicating their products or services, it should not be overlooked that the welfare effects of such a copying strategy are ambiguous. While the practice could benefit consumers in the short term by lowering prices and increasing choice, it may discourage innovation over the longer term if third parties anticipate being copied whenever they deliver successful products or services. Therefore, the success of an antitrust investigation essentially relies on demonstrating a harm to innovation that would induce business users to leave the market or stop developing their products and services. In other words, antitrust authorities should be able to demonstrate that, by allowing dominant platforms to free ride on their business guests’ innovation efforts, sherlocking would negatively affect rivals’ ability to compete.

A. The Welfare Effects of Copying

The tradeoff between the short- and long-term welfare effects of copying has traditionally been analyzed in the context of the benefits and costs generated by intellectual-property protection.[65] In particular, the economic literature investigating the optimal life of patents[66] and copyrights[67] focuses on the efficient balance between dynamic benefits associated with innovation and the static costs of monopoly power granted by IPRs.

More recently, product imitation has instead been investigated in the different scenario of digital markets, where dominant platforms adopting a hybrid business model may use third-party sellers’ market data to design and promote their own products over their rivals’ offerings. Indeed, some studies report that large online platforms may attempt to protect their market position by creating “kill zones” around themselves—i.e., by acquiring, copying, or eliminating their rivals.[68] In such a novel setting, the welfare effects of copying are assessed regardless of the presence and the potential enforcement of IPRs, but within a strategy aimed at excluding rivals by exploiting the dual role of both umpire and player to get preferential access to sensitive data and free ride on their innovative efforts.[69]

Even in this context, however, a challenging tradeoff should be considered. Indeed, while in the short term, consumers may benefit from the platform’s imitation strategy in terms of lower prices and higher quality, they may be harmed in the longer term if third parties are discouraged from delivering new products and services. As a result, while there is empirical evidence on hybrid platforms successfully entering into third parties’ adjacent market segments, [70] the extant academic literature finds the welfare implications of such moves to be ambiguous.

A first strand of literature attempts to estimate the welfare impact of the hybrid business model. Notably, Andre Hagiu, Tat-How Teh, and Julian Wright elaborated a model to address the potential implications of an outright ban on platforms’ dual mode, finding that such a structural remedy may harm consumer surplus and welfare even where the platform would otherwise engage in product imitation and self-preferencing.[71] According to the authors, banning the dual mode does not restore the third-party seller’s innovation incentives or the effective price competition between products, which are the putative harms caused by imitation and self-preferencing. Therefore, the authors’ evaluation was that interventions specifically targeting product imitation and self-preferencing were preferable.

Germa?n Gutie?rrez suggested that banning the dual model would generate hardly any benefits for consumers, showing that, in the Amazon case, interventions that eliminate either the Prime program or product variety are likely to decrease welfare.[72]

Further, analyzing Amazon’s business model, Federico Etro found that the platform and consumers’ incentives are correctly aligned, and that Amazon’s business model of hosting sellers and charging commissions prevents the company from gaining through systematic self?preferencing for its private-label and first-party products.[73] In the same vein, on looking at its business model and monetization strategy, Patrick Andreoli-Versbach and Joshua Gans argued that Amazon does not have an obvious incentive to self-preference.[74] Indeed, Amazon’s profitability data show that, on average, the company’s operating margin is higher on third-party sales than on first-party retail sales.

Looking at how modeling details may yield different results with regard to the benefits and harms of the hybrid business model, Simon Anderson and O?zlem Bedre-Defoile maintain that the platform’s choice to sell its own products benefits consumers by lowering prices when a monopoly platform hosts competitive fringe sellers, regardless of the platform’s position as a gatekeeper, whether sellers have an alternate channel to reach consumers, or whether alternate channels are perfect or imperfect substitutes for the platform channel.[75] On the other hand, the authors argued that platform product entry might harm consumers when a big seller with market power sells on its own channel and also on the platform. Indeed, in that case, the platform setting a seller fee before the big seller prices its differentiated products introduces double markups on the big seller’s platform-channel price and leaves some revenue to the big seller.

Studying whether Amazon engages in self-preferencing on its marketplace by favoring its own brands in search results, Chiara Farronato, Andrey Fradkin, and Alexander MacKay demonstrate empirically that Amazon brands remain about 30% cheaper and have 68% more reviews than other similar products.[76] The authors acknowledge, however, that their findings do not imply that consumers are hurt by Amazon brands’ position in search results.

Another strand of literature specifically tackles the welfare effects of sherlocking. In particular, Erik Madsen and Nikhil Vellodi developed a theoretical framework to demonstrate that a ban on insider imitation can either stifle or stimulate innovation, depending on the nature of innovation.[77] Specifically, the ban could stimulate innovation for experimental product categories, while reducing innovation in incremental product markets, since the former feature products with a large chance of superstar demand and the latter generate mostly products with middling demand.

Federico Etro maintains that the tradeoffs at-issue are too complex to be solved with simple interventions, such as bans on dual mode, self-preferencing, or copycatting.[78] Indeed, it is difficult to conclude that Amazon entry is biased to expropriate third-party sellers or that bans on dual mode, self-preferencing, or copycatting would benefit consumers, because they either degrade services and product variety or induce higher prices or commissions.

Similar results are provided by Jay Pil Choi, Kyungmin Kim, and Arijit Mukherjee, who developed a tractable model of a platform-run marketplace where the platform charges a referral fee to the sellers for access to the marketplace, and may also subsequently launch its own private-label product by copying a seller.[79] The authors found that a policy to either ban hybrid mode or only prohibit information use for the launch of private-label products may produce negative welfare implications.

Further, Radostina Shopova argues that, when introducing a private label, the marketplace operator does not have incentive to distort competition and foreclose the outside seller, but does have an incentive to lower fees charged to the outside seller and to vertically differentiate its own product in order to protect the seller’s channel.[80] Even when the intermediary is able to perfectly mimic the quality of the outside seller and monopolize its product space, the intermediary prefers to differentiate its offer and chooses a lower quality for the private-label product. Accordingly, as the purpose of private labels is to offer a lower-quality version of products aimed at consumers with a lower willingness to pay, a marketplace operator does not have an incentive to distort competition in favor of its own product and foreclose the seller of the original higher-quality product.

In addition, according to Jean-Pierre Dubé, curbing development of private-label programs would harm consumers and Amazon’s practices amount to textbook retailing, as they follow an off-the-shelf approach to managing private-label products that is standard for many retail chains in the West.[81] As a result, singling out Amazon’s practices would set a double standard.

Interestingly, such findings about predictors and effects of Amazon’s entry in competition with third-party merchants on its own marketplace are confirmed by the only empirical study developed so far. In particular, analyzing the Home & Kitchen department of Germany’s version of Amazon Marketplace between 2016 and 2021, Gregory S. Crawford, Matteo Courthoud, Regina Seibel, and Simon Zuzek’s results suggest that Amazon’s entry strategy was more consistent with making Marketplace more attractive to consumers than expropriating third-party merchants.[82] Notably, the study showed that, comparing Amazon’s entry decisions with those of the largest third-party merchants, Amazon tends to enter low-growth and low-quality products, which is consistent with a strategy that seeks to make Marketplace more attractive by expanding variety, lessening third-party market power, and/or enhancing product availability. The authors therefore found that Amazon’s entry on Amazon Marketplace demonstrated no systematic adverse effects and caused a mild market expansion.

Massimo Motta and Sandro Shelegia explored interactions between copying and acquisitions, finding that the former (or the threat of copying) can modify the outcome of an acquisition negotiation.[83] According to their model, there could be both static and dynamic incentives for an incumbent to introduce a copycat version of a complementary product. The static rationale consists of lowering the price of the complementary product in order to capture more rents from it, while the dynamic incentive consists of harming a potential rival’s prospects of developing a substitute. The latter may, in turn, affect the direction the entrant takes toward innovation. Anticipating the incumbent’s copying strategy, the entrant may shift resources from improvements to compete with the incumbent’s primary product to developing complementary products.

Jingcun Cao, Avery Haviv, and Nan Li analyzed the opposite scenario—i.e., copycats that seek to mimic the design and user experience of incumbents’ successful products.[84] The authors find empirically that, on average, copycat apps do not have a significant effect on the demand for incumbent apps and that, as with traditional counterfeit products, they may generate a positive demand spillover toward authentic apps.

Massimo Motta also investigated the potential foreclosure effects of platforms adopting a copycat strategy committed to non-discriminatory terms of access for third parties (e.g., Apple App Store, Google Play, and Amazon Marketplace).[85] Notably, according to Motta, when a third-party seller is particularly successful and the platform is unable to raise fees and commissions paid by that seller, the platform may prefer to copy its product or service to extract more profits from users, rather than rely solely on third-party sales. The author acknowledged, however, that even though this practice may create an incentive for self-preferencing, it does not necessarily have anticompetitive effects. Indeed, the welfare effects of the copying strategy are a priori ambiguous.[86] While, on the one hand, the platform’s copying of a third-party product benefits consumers by increasing variety and competition among products, on the other hand, copying might be wasteful for society, in that it entails a fixed cost and may discourage innovation if rivals anticipate that they will be systematically copied whenever they have a successful product.[87] Therefore, introducing a copycat version of a product offered by a firm in an adjacent market might be procompetitive.

B. Antitrust Assessment: Competition, Innovation, and Double Standards

The economic literature has demonstrated that the rationale and welfare effects of sherlocking by hybrid platforms are definitively ambiguous. Against concerns about rivals’ foreclosure, some studies provide a different narrative, illustrating that such a strategy is more consistent with making the platform more attractive to consumers (by differentiating the quality and pricing of the offer) than expropriating business users.[88] Furthermore, copies, imitations, and replicas undoubtedly benefit consumers with more choice and lower prices.

Therefore, the only way to consider sherlocking anticompetitive is by demonstrating long-term deterrent effects on innovation (i.e., reducing rivals’ incentives to invest in new products and services) outweigh consumers’ short-term advantages.[89] Moreover, deterrent effects must not be merely hypothetical, as a finding of abuse cannot be based on a mere possibility of harm.[90] In any case, such complex tradeoffs are at odds with a blanket ban.[91]

Moreover, assessments of the potential impact of sherlocking on innovation cannot disregard the role of IPRs—which are, by definition, the main primary to promote innovation. From this perspective, intellectual-property protection is best characterized as another form of tradeoff. Indeed, the economic rationale of IPRs (in particular, of patents and copyrights) involves, among other things, a tradeoff between access and incentives—i.e., between short-term competitive restrictions and long-term innovative benefits.[92]

According to the traditional incentive-based theory of intellectual property, free riding would represent a dangerous threat that justifies the exclusive rights granted by intellectual-property protection. As a consequence, so long as copycat expropriation does not infringe IPRs, it should be presumed legitimate and procompetitive. Indeed, such free riding is more of an intellectual-property issue than a competitive concern.

In addition, to strike a fair balance between restricting competition and providing incentives to innovation, the exclusive rights granted by IPRs are not unlimited in terms of duration, nor in terms of lawful (although not authorized) uses of the protected subject matter. Under the doctrine of fair use, for instance, reverse engineering represents a legitimate way to obtain information about a firm’s product, even if the intended result is to produce a directly competing product that may steer customers away from the initial product and the patented invention.

Outside of reverse engineering, copying is legitimately exercised once IPRs expire, when copycat competitors can reproduce previously protected elements. As a result of the competitive pressure exerted by new rivals, holders of expired IPRs may react by seeking solutions designed to block or at least limit the circulation of rival products. They could, for example, request other IPRs to cover aspects or functionalities different from those previously protected. They could also bring (sometimes specious) legal action for infringement of the new IPR or for unfair competition by slavish imitation. For these reasons, there have been occasions where copycat competitors have received protection from antitrust authorities against sham litigation brought by IPR holders concerned about losing margins due to pricing pressure from copycats.[93]

Finally, within the longstanding debate on the intersection of intellectual-property protection and competition, EU antitrust authorities have traditionally been unsympathetic toward restrictions imposed by IPRs. The success of the essential-facility doctrine (EFD) is the most telling example of this attitude, as its application in the EU has been extended to IPRs. As a matter of fact, the EFD represents the main antitrust tool for overseeing intellectual property in the EU.[94]

After Microsoft, EU courts have substantially dismantled one of the “exceptional circumstances” previously elaborated in Magill and specifically introduced for cases involving IPRs, with the aim of safeguarding a balance between restrictions to access and incentives to innovate. Whereas the CJEU established in Magill that refusal to grant an IP license should be considered anticompetitive if it prevents the emergence of a new product for which there is potential consumer demand, in Microsoft, the General Court considered such a requirement met even when access to an IPR is necessary for rivals to merely develop improved products with added value.

Given this background, recent competition-policy concerns about sherlocking are surprising. To briefly recap, the practice at-issue increases competition in the short term, but may affect incentives to innovate in the long-term. With regard to the latter, however, the practice neither involves products protected by IPRs nor constitutes a slavish imitation that may be caught under unfair-competition laws.

The case of Amazon, which has received considerable media coverage, is illustrative of the relevance of IP protection. Amazon has been accused of cloning batteries, power strips, wool runner shoes, everyday sling bags, camera tripods, and furniture.[95] One may wonder what kind of innovation should be safeguarded in these cases against potential copies. Admittedly, such examples appear consistent with the findings of the already-illustrated empirical study conducted by Crawford et al. indicating that Amazon tends to enter low-quality products in order to expand variety on the Marketplace and to make it more attractive to consumers.

Nonetheless, if an IPR is involved, right holders are provided with proper means to protect their products against infringement. Indeed, one of the alleged targeted companies (Williams-Sonoma) did file a complaint for design and trademark infringement, claiming that Amazon had copied a chair (Orb Dining Chair) sold by its West Elm brand. According to Williams-Sonoma, the Upholstered Orb Office Chair—which Amazon began selling under its Rivet brand in 2018—was so similar that the ordinary observer would be confused by the imitation.[96] If, instead, the copycat strategy does not infringe any IPR, the potential impact on innovation might not be considered particularly worrisome—at least at first glance.

Further, neither the degree to which third-party business data is unavailable nor the degree to which they are relevant in facilitating copying are clear cut. For instance, in the case of Amazon, public product reviews supply a great deal of information[97] and, regardless of the fact that a third party is selling a product on the Marketplace, anyone can obtain an item for the purposes of reverse engineering.[98]

In addition, antitrust authorities are used to intervening against opportunistic behavior by IPR holders. European competition authorities, in particular, have never before seemed particularly responsive to the motives of inventors and creators versus the need to encourage maximum market openness.

It should also be noted that cloning is a common strategy in traditional markets (e.g., food products)[99] and has been the subject of longstanding controversies between high-end fashion brands and fast-fashion brands (e.g., Zara, H&M).[100] Furthermore, brick-and-mortar retailers also introduce private labels and use other brands’ sales records in deciding what to produce.[101]

So, what makes sherlocking so different and dangerous when deployed in digital markets as to push competition authorities to contradict themselves?[102]

The double standard against sherlocking reflects the same concern and pursues the same goal of the various other attempts to forbid any form of self-preferencing in digital markets. Namely, antitrust investigations of sherlocking are fundamentally driven by the bias against hybrid and vertically integrated players. The investigations rely on the assumption that conflicts of interest have anticompetitive implications and that, therefore, platform neutrality should be promoted to ensure the neutrality of the competitive process.[103] Accordingly, hostility toward sherlocking may involve both of the illustrated scenarios—i.e., the use of nonpublic third-party business data either in adopting any business decision, or just copycat strategies, in particular.

As a result, however, competition authorities end up challenging a specific business model, rather than the specific practice at-issue, which brings undisputed competitive benefits in terms of lower prices and wider consumer choice, and which should therefore be balanced against potential exclusionary risks. As the CJEU has pointed out, the concept of competition on the merits:

…covers, in principle, a competitive situation in which consumers benefit from lower prices, better quality and a wider choice of new or improved goods and services. Thus, … conduct which has the effect of broadening consumer choice by putting new goods on the market or by increasing the quantity or quality of the goods already on offer must, inter alia, be considered to come within the scope of competition on the merits.[104]

Further, in light of the “as-efficient competitor” principle, competition on the merits may lead to “the departure from the market, or the marginalization of, competitors that are less efficient and so less attractive to consumers from the point of view of, among other things, price, choice, quality or innovation.”[105]

It has been correctly noted that the “as-efficient competitor” principle is a reminder of what competition law is about and how it differs from regulation.[106] Competition law aims to protect a process, rather than engineering market structures to fulfill a particular vision of how an industry is to operate.[107] In other words, competition law does not target firms on the basis of size or status and does not infer harm from (market or bargaining) power or business model. Therefore, neither the dual role played by some large online platforms nor their preferential access to sensitive business data or their vertical integration, by themselves, create a competition problem. Competitive advantages deriving from size, status, power, or business model cannot be considered per se outside the scope of competition on the merits.

Some policymakers have sought to resolve these tensions in how competition law regards sherlocking by introducing or envisaging an outright ban. These initiatives and proposals have clearly been inspired by antitrust investigations, but they did so for the wrong reasons. Instead of taking stock of the challenging tradeoffs between short-term benefits and long-term risks that an antitrust assessment of sherlocking requires, they blamed competition law for not providing effective tools to achieve the policy goal of platform neutrality.[108] Therefore, the regulatory solution is merely functional to bypass the traditional burden of proof of antitrust analysis and achieve what competition-law enforcement cannot provide.

V. Conclusion

The bias against self-preferencing strikes again. Concerns about hybrid platforms’ potential conflicts of interest have led policymakers to seek prohibitions to curb different forms of self-preferencing, making the latter the symbol of the competition-policy zeitgeist in digital markets. Sherlocking shares this fate. Indeed, the DMA outlaws any use of business users’ nonpublic data and similar proposals have been advanced in the United States, Australia, and Japan. Further, like other forms of self-preferencing, such regulatory initiatives against sherlocking have been inspired by previous antitrust proceedings.

Drawing on these antitrust investigations, the present research shows the extent to which an outright ban on sherlocking is unjustified. Notably, the practice at-issue includes two different scenarios: the broad case in which a gatekeeper exploits its preferential access to business users’ data to better calibrate all of its business decisions and the narrow case in which such data is used to adopt a copycat strategy. In either scenario, the welfare effects and competitive implications of sherlocking are unclear.

Indeed, the use of certain data by a hybrid platform to improve business decisions generally should be classified as competition on the merits, and may yield an increase in both intra-platform (with respect to business users) and inter-platform (with respect to other platforms) competition. This would benefit consumers in terms of lower prices, better quality, and a wider choice of new or improved goods and services. In a similar vein, if sherlocking is used to deliver replicas of business users’ products or services, the anti-competitiveness of such a strategy may only result from a cumbersome tradeoff between short-term benefits (i.e., lower prices and wider choice) and negative long-term effects on innovation.

An implicit confirmation of the difficulties encountered in demonstrating the anti-competitiveness of sherlocking comes from the recent complaint issued by the FTC against Amazon.[109] Current FTC Chairwoman Lina Khan devoted a significant portion of her previous academic career to questioning Amazon’s practices (including the decision to introduce its own private labels inspired by third-party products)[110] and to supporting the adoption of structural-separation remedies to tackle platforms’ conflicts of interest that induce them to exploit their “systemic informational advantage (gleaned from competitors)” to thwart rivals and strengthen their own position by introducing replica products.[111] Despite these premises and although the FTC’s complaint targets numerous practices belonging to what has been described as an interconnected strategy to block off every major avenue of competition, however, sherlocking is surprisingly off the radar.

Regulatory initiatives to ban sherlocking in order to ensure platform neutrality with respect to business users and a level playing field among rivals would sacrifice undisputed procompetitive benefits on the altar of policy goals that competition rules are not meant to pursue. Sherlocking therefore appears to be a perfect case study of the side effects of unwarranted interventions in digital markets.

[1] Giuseppe Colangelo, Antitrust Unchained: The EU’s Case Against Self-Preferencing, 72 GRUR International 538 (2023).

[2] Jacques Cre?mer, Yves-Alexandre de Montjoye, & Heike Schweitzer, Competition Policy for the Digital Era (2019), 7, https://op.europa.eu/en/publication-detail/-/publication/21dc175c-7b76-11e9-9f05-01aa75ed71a1/language-en (all links last accessed 3 Jan. 2024); UK Digital Competition Expert Panel, Unlocking Digital Competition, (2019) 58, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf.

[3] You’ve Been Sherlocked, The Economist (2012), https://www.economist.com/babbage/2012/07/13/youve-been-sherlocked.

[4] Regulation (EU) 2022/1925 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act) (2022), OJ L 265/1, Article 6(2).

[5] U.S. S. 2992, American Innovation and Choice Online Act (AICOA) (2022), Section 3(a)(6), available at https://www.klobuchar.senate.gov/public/_cache/files/b/9/b90b9806-cecf-4796-89fb-561e5322531c/B1F51354E81BEFF3EB96956A7A5E1D6A.sil22713.pdf. See also U.S. House of Representatives, Subcommittee on Antitrust, Commercial, and Administrative Law, Investigation of Competition in Digital Markets, Majority Staff Reports and Recommendations (2020), 164, 362-364, 378, available at https://democrats-judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf.

[6] Australian Competition and Consumer Commission, Digital Platform Services Inquiry Report on Regulatory Reform (2022), 125, https://www.accc.gov.au/about-us/publications/serial-publications/digital-platform-services-inquiry-2020-2025/digital-platform-services-inquiry-september-2022-interim-report-regulatory-reform.

[7] Japan Fair Trade Commission, Market Study Report on Mobile OS and Mobile App Distribution (2023), https://www.jftc.go.jp/en/pressreleases/yearly-2023/February/230209.html.

[8] European Commission, 10 Nov. 2020, Case AT.40462, Amazon Marketplace; see Press Release, Commission Sends Statement of Objections to Amazon for the Use of Non-Public Independent Seller Data and Opens Second Investigation into Its E-Commerce Business Practices, European Commission (2020), https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2077.

[9] Press Release, CMA Investigates Amazon Over Suspected Anti-Competitive Practices, UK Competition and Markets Authority (2022), https://www.gov.uk/government/news/cma-investigates-amazon-over-suspected-anti-competitive-practices.

[10] European Commission, 16 Jun. 2020, Case AT.40716, Apple – App Store Practices.

[11] Press Release, Commission Sends Statement of Objections to Meta over Abusive Practices Benefiting Facebook Marketplace, European Commission (2022), https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7728; Press Release, CMA Investigates Facebook’s Use of Ad Data, UK Competition and Markets Authority (2021), https://www.gov.uk/government/news/cma-investigates-facebook-s-use-of-ad-data.

[12] DMA, supra note 4, Recital 10 and Article 1(6).

[13] GWB Digitalization Act, 18 Jan. 2021, Section 19a. On risks of overlaps between the DMA and the competition law enforcement, see Giuseppe Colangelo, The European Digital Markets Act and Antitrust Enforcement: A Liaison Dangereuse, 47 European Law Review 597.

[14] GWB, supra note 13, Section 19a (2)(4)(b).

[15] Press Release, Commission Sends Statement of Objections to Apple Clarifying Concerns over App Store Rules for Music Streaming Providers, European Commission (2023), https://ec.europa.eu/commission/presscorner/detail/en/ip_23_1217.

[16] European Commission, 20 Dec. 2022, Case AT.40462; Press Release, Commission Accepts Commitments by Amazon Barring It from Using Marketplace Seller Data, and Ensuring Equal Access to Buy Box and Prime, European Commission (2022), https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7777; UK Competition and Markets Authority, 3 Nov. 2023, Case No. 51184, https://www.gov.uk/cma-cases/investigation-into-amazons-marketplace.

[17] UK Competition and Markets Authority, 3 Nov. 2023, Case AT.51013, https://www.gov.uk/cma-cases/investigation-into-facebooks-use-of-data.

[18] See, e.g., Gil Tono & Lewis Crofts (2022), Amazon Data Commitments Match DMA Obligations, EU’s Vestager Say, mLex (2022), https://mlexmarketinsight.com/news/insight/amazon-data-commitments-match-dma-obligation-eu-s-vestager-says (reporting that Commissioner Vestager stated that Amazon’s data commitments definitively appear to match what would be asked within the DMA).

[19] DMA, supra note 4, Recital 46.

[20] Id., Article 6(2) (also stating that, for the purposes of the prohibition, non-publicly available data shall include any aggregated and non-aggregated data generated by business users that can be inferred from, or collected through, the commercial activities of business users or their customers, including click, search, view, and voice data, on the relevant core platform services or on services provided together with, or in support of, the relevant core platform services of the gatekeeper).

[21] AICOA, supra note 5.

[22] U.S. House of Representatives, supra note 5; see also Lina M. Khan, The Separation of Platforms and Commerce, 119 Columbia Law Review 973 (2019).

[23] U.S. Federal Trade Commission, et al. v. Amazon.com, Inc., Case No. 2:23-cv-01495 (W.D. Wash., 2023).

[24] Australian Competition and Consumer Commission, supra note 6, 125.

[25] Id., 124.

[26] Japan Fair Trade Commission, supra note 7, 144.

[27] European Commission, supra note 8. But see also Amazon, Supporting Sellers with Tools, Insights, and Data (2021), https://www.aboutamazon.eu/news/policy/supporting-sellers-with-tools-insights-and-data (claiming that the company is just using aggregate (rather than individual) data: “Just like our third-party sellers and other retailers across the world, Amazon also uses data to run our business. We use aggregated data about customers’ experience across the store to continuously improve it for everyone, such as by ensuring that the store has popular items in stock, customers are finding the products they want to purchase, or connecting customers to great new products through automated merchandising.”)

[28] European Commission, supra note 16.

[29] UK Competition and Markets Authority, supra notes 9 and 16.

[30] Bundeskartellamt, 5 Jul. 2022, Case B2-55/21, paras. 493, 504, and 518.

[31] Id., para. 536.

[32] European Commission, supra note 10.

[33] European Commission, supra note 11; UK Competition and Markets Authority, supra note 11.

[34] European Commission, supra note 16. In a similar vein, see also UK Competition and Markets Authority, supra note 16, paras. 4.2-4.7.

[35] European Commission, supra note 16, para. 111.

[36] Id., para. 123.

[37] Cre?mer, de Montjoye, & Schweitzer, supra note 2, 33-34.

[38] See, e.g., Marc Bourreau, Some Economics of Digital Ecosystems, OECD Hearing on Competition Economics of Digital Ecosystems (2020), https://www.oecd.org/daf/competition/competition-economics-of-digital-ecosystems.htm; Amelia Fletcher, Digital Competition Policy: Are Ecosystems Different?, OECD Hearing on Competition Economics of Digital Ecosystems (2020).

[39] See, e.g., Cristina Caffarra, Matthew Elliott, & Andrea Galeotti, ‘Ecosystem’ Theories of Harm in Digital Mergers: New Insights from Network Economics, VoxEU (2023), https://cepr.org/voxeu/columns/ecosystem-theories-harm-digital-mergers-new-insights-network-economics-part-1 (arguing that, in merger control, the implementation of an ecosystem theory of harm would require assessing how a conglomerate acquisition can change the network of capabilities (e.g., proprietary software, brand, customer-base, data) in order to evaluate how easily competitors can obtain alternative assets to those being acquired); for a different view, see Geoffrey A. Manne & Dirk Auer, Antitrust Dystopia and Antitrust Nostalgia: Alarmist Theories of Harm in Digital Markets and Their Origins, 28 George Mason Law Review 1281(2021).

[40] See, e.g., Viktoria H.S.E. Robertson, Digital merger control: adapting theories of harm, (forthcoming) European Competition Journal; Caffarra, Elliott, & Galeotti, supra note 39; OECD, Theories of Harm for Digital Mergers (2023), available at www.oecd.org/daf/competition/theories-of-harm-for-digital-mergers-2023.pdf; Bundeskartellamt, Merger Control in the Digital Age – Challenges and Development Perspectives (2022), available at https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Diskussions_Hintergrundpapiere/2022/Working_Group_on_Competition_Law_2022.pdf?__blob=publicationFile&v=2; Elena Argentesi, Paolo Buccirossi, Emilio Calvano, Tomaso Duso, Alessia Marrazzo, & Salvatore Nava, Merger Policy in Digital Markets: An Ex Post Assessment, 17 Journal of Competition Law & Economics 95 (2021); Marc Bourreau & Alexandre de Streel, Digital Conglomerates and EU Competition Policy (2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3350512.

[41] Bundeskartellamt, 11 Feb. 2022, Case B6-21/22, https://www.bundeskartellamt.de/SharedDocs/Entscheidung/EN/Fallberichte/Fusionskontrolle/2022/B6-21-22.html;jsessionid=C0837BD430A8C9C8E04D133B0441EB95.1_cid362?nn=4136442.

[42] UK Competition and Markets Authority, Microsoft / Activision Blizzard Merger Inquiry (2023), https://www.gov.uk/cma-cases/microsoft-slash-activision-blizzard-merger-inquiry.

[43] See European Commission, Commission Prohibits Proposed Acquisition of eTraveli by Booking (2023), https://ec.europa.eu/commission/presscorner/detail/en/ip_23_4573 (finding that a flight product is a crucial growth avenue in Booking’s ecosystem, which revolves around its hotel online-travel-agency (OTA) business, as it would generate significant additional traffic to the platform, thus allowing Booking to benefit from existing customer inertia and making it more difficult for competitors to contest Booking’s position in the hotel OTA market).

[44] Thomas Eisenmann, Geoffrey Parker, & Marshall Van Alstyne, Platform Envelopment, 32 Strategic Management Journal 1270 (2011).

[45] See, e.g., Colangelo, supra note 1, and Pablo Iba?n?ez Colomo, Self-Preferencing: Yet Another Epithet in Need of Limiting Principles, 43 World Competition 417 (2020) (investigating whether and to what extent self-preferencing could be considered a new standalone offense in EU competition law); see also European Commission, Digital Markets Act – Impact Assessment Support Study (2020), 294, https://op.europa.eu/en/publication-detail/-/publication/0a9a636a-3e83-11eb-b27b-01aa75ed71a1/language-en (raising doubts about the novelty of this new theory of harm, which seems similar to the well-established leveraging theories of harm of tying and bundling, and margin squeeze).

[46] European Commission, supra note 45, 16.

[47] European Commission, 27 Jun. 2017, Case AT.39740, Google Search (Shopping).

[48] See General Court, 10 Nov. 2021, Case T-612/17, Google LLC and Alphabet Inc. v. European Commission, ECLI:EU:T:2021:763, para. 155 (stating that the general principle of equal treatment obligates vertically integrated platforms to refrain from favoring their own services as opposed to rival ones; nonetheless, the ruling framed self-preferencing as discriminatory abuse).

[49] In the meantime, however, see Opinion of the Advocate General Kokott, 11 Jan. 2024, Case C-48/22 P, Google v. European Commission, ECLI:EU:C:2024:14, paras. 90 and 95 (arguing that the self-preferencing of which Google is accused constitutes an independent form of abuse, albeit one that exhibits some proximity to cases involving margin squeezing).

[50] European Commission, Commission Sends Amazon Statement of Objections over Proposed Acquisition of iRobot (2023), https://ec.europa.eu/commission/presscorner/detail/en/IP_23_5990.

[51] The same concerns and approach have been shared by the CMA, although it reached a different conclusion, finding that the new merged entity would not have incentive to self-preference its own branded RVCs: see UK Competition and Markets Authority, Amazon / iRobot Merger Inquiry – Clearance Decision (2023), paras. 160, 188, and 231, https://www.gov.uk/cma-cases/amazon-slash-irobot-merger-inquiry.

[52] See European Commission, supra note 45, 304.

[53] Id., 313-314 (envisaging, among potential remedies, the imposition of a duty to make all data used by the platform for strategic decisions available to third parties); see also Désirée Klinger, Jonathan Bokemeyer, Benjamin Della Rocca, & Rafael Bezerra Nunes, Amazon’s Theory of Harm, Yale University Thurman Arnold Project (2020), 19, available at https://som.yale.edu/sites/default/files/2022-01/DTH-Amazon.pdf.

[54] Colangelo, supra note 1; see also Oscar Borgogno & Giuseppe Colangelo, Platform and Device Neutrality Regime: The New Competition Rulebook for App Stores?, 67 Antitrust Bulletin 451 (2022).

[55] See Court of Justice of the European Union (CJEU), 12 May 2022, Case C-377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato, ECLI:EU:C:2022:379; 19 Apr. 2018, Case C-525/16, MEO v. Autoridade da Concorrência, ECLI:EU:C:2018:270; 6 Sep. 2017, Case C-413/14 P, Intel v. Commission, ECLI:EU:C:2017:632; 6 Oct. 2015, Case C-23/14, Post Danmark A/S v. Konkurrencerådet (Post Danmark II), ECLI:EU:C:2015:651; 27 Mar. 2012, Case C-209/10, Post Danmark A/S v Konkurrencera?det (Post Danmark I), ECLI: EU:C:2012:172; for a recent overview of the EU case law, see also Pablo Iba?n?ez Colomo, The (Second) Modernisation of Article 102 TFEU: Reconciling Effective Enforcement, Legal Certainty and Meaningful Judicial Review, SSRN (2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4598161.

[56] CJEU, Intel, supra note 55, paras. 133-134.

[57] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 73.

[58] Opinion of Advocate General Rantos, 9 Dec. 2021, Case C?377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato, ECLI:EU:C:2021:998, para. 45.

[59] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 77.

[60] Id., paras. 77, 80, and 83.

[61] CJEU, 26 Nov.1998, Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG, ECLI:EU:C:1998:569.

[62] CJEU, Servizio Elettrico Nazionale, supra note 55, para. 85.

[63] European Commission, supra note 11; UK Competition and Markets Authority, supra note 17, paras. 2.6, 4.3, and 4.7.

[64] See, e.g., European Commission, Case COMP D3/34493, DSD, para. 112 (2001) OJ L166/1; affirmed in GC, 24 May 2007, Case T-151/01, DerGru?nePunkt – Duales System DeutschlandGmbH v. European Commission, ECLI:EU:T:2007:154 and CJEU, 16 Jul. 2009, Case C-385/07 P, ECLI:EU:C:2009:456; European Commission, Case IV/31.043, Tetra Pak II, paras. 105–08, (1992) OJ L72/1; European Commission, Case IV/29.971, GEMA III, (1982) OJ L94/12; CJUE, 27 Mar. 1974, Case 127/73, Belgische Radio en Televisie e socie?te? belge des auteurs, compositeurs et e?diteurs v. SV SABAM and NV Fonior, ECLI:EU:C:1974:25, para. 15; European Commission, Case IV/26.760, GEMA II, (1972) OJ L166/22; European Commission, Case IV/26.760, GEMA I, (1971) OJ L134/15.

[65] See, e.g., Richard A. Posner, Intellectual Property: The Law and Economics Approach, 19 The Journal of Economic Perspectives 57 (2005).

[66] See, e.g., Richard Gilbert & Carl Shapiro, Optimal Patent Length and Breadth, 21 The RAND Journal of Economics 106 (1990); Pankaj Tandon, Optimal Patents with Compulsory Licensing, 90 Journal of Political Economy 470 (1982); Frederic M. Scherer, Nordhaus’ Theory of Optimal Patent Life: A Geometric Reinterpretation, 62 American Economic Review 422 (1972); William D. Nordhaus, Invention, Growth, and Welfare: A Theoretical Treatment of Technological Change, Cambridge, MIT Press (1969).

[67] See, e.g., Hal R. Varian, Copying and Copyright, 19 The Journal of Economic Perspectives 121 (2005); William R. Johnson, The Economics of Copying, 93 Journal of Political Economy 158 (1985); Stephen Breyer, The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies, and Computer Programs, 84 Harvard Law Review 281 (1970).

[68] Sai Krishna Kamepalli, Raghuram Rajan, & Luigi Zingales, Kill Zone, NBER Working Paper No. 27146 (2022), http://www.nber.org/papers/w27146; Massimo Motta & Sandro Shelegia, The “Kill Zone”: Copying, Acquisition and Start-Ups’ Direction of Innovation, Barcelona GSE Working Paper Series Working Paper No. 1253 (2021), https://bse.eu/research/working-papers/kill-zone-copying-acquisition-and-start-ups-direction-innovation; U.S. House of Representatives, Subcommittee on Antitrust, Commercial, and Administrative Law, supra note 8, 164; Stigler Committee for the Study of Digital Platforms, Market Structure and Antitrust Subcommittee (2019) 54, https://research.chicagobooth.edu/stigler/events/single-events/antitrust-competition-conference/digital-platforms-committee; contra, see Geoffrey A. Manne, Samuel Bowman, & Dirk Auer, Technology Mergers and the Market for Corporate Control, 86 Missouri Law Review 1047 (2022).

[69] See also Howard A. Shelanski, Information, Innovation, and Competition Policy for the Internet, 161 University of Pennsylvania Law Review 1663 (2013), 1999 (describing as “forced free riding” the situation occurring when a platform appropriates innovation by other firms that depend on the platform for access to consumers).

[70] See Feng Zhu & Qihong Liu, Competing with Complementors: An Empirical Look at Amazon.com, 39 Strategic Management Journal 2618 (2018).

[71] Andrei Hagiu, Tat-How Teh, and Julian Wright, Should Platforms Be Allowed to Sell on Their Own Marketplaces?, 53 RAND Journal of Economics 297 (2022), (the model assumes that there is a platform that can function as a seller and/or a marketplace, a fringe of small third-party sellers that all sell an identical product, and an innovative seller that has a better product in the same category as the fringe sellers and can invest more in making its product even better; further, the model allows the different channels (on-platform or direct) and the different sellers to offer different values to consumers; therefore, third-party sellers (including the innovative seller) can choose whether to participate on the platform’s marketplace, and whenever they do, can price discriminate between consumers that come to it through the marketplace and consumers that come to it through the direct channel).

[72] See Germa?n Gutie?rrez, The Welfare Consequences of Regulating Amazon (2022), available at http://germangutierrezg.com/Gutierrez2021_AMZ_welfare.pdf (building an equilibrium model where consumers choose products on the Amazon platform, while third-party sellers and Amazon endogenously set prices of products and platform fees).

[73] See Federico Etro, Product Selection in Online Marketplaces, 30 Journal of Economics & Management Strategy 614 (2021), (relying on a model where a marketplace such as Amazon provides a variety of products and can decide, for each product, whether to monetize sales by third-party sellers through a commission or become a seller on its platform, either by commercializing a private label version or by purchasing from a vendor and resell as a first party retailer; as acknowledged by the author, a limitation of the model is that it assumes that the marketplace can set the profit?maximizing commission on each product; if this is not the case, third-party sales would be imperfectly monetized, which would increase the relative profitability of entry).

[74] Patrick Andreoli-Versbach & Joshua Gans, Interplay Between Amazon Store and Logistics, SSRN (2023) https://ssrn.com/abstract=4568024.

[75] Simon Anderson & O?zlem Bedre-Defolie, Online Trade Platforms: Hosting, Selling, or Both?, 84 International Journal of Industrial Organization 102861 (2022).

[76] Chiara Farronato, Andrey Fradkin, & Alexander MacKay, Self-Preferencing at Amazon: Evidence From Search Rankings, NBER Working Paper No. 30894 (2023), http://www.nber.org/papers/w30894.

[77] See Erik Madsen & Nikhil Vellodi, Insider Imitation, SSRN (2023) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3832712 (introducing a two-stage model where the platform publicly commits to an imitation policy and the entrepreneur observes this policy and chooses whether to innovate: if she chooses not to, the game ends and both players earn profits normalized to zero; otherwise, the entrepreneur pays a fixed innovation cost to develop the product, which she then sells on a marketplace owned by the platform).

[78] Federico Etro, The Economics of Amazon, SSRN (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4307213.

[79] Jay Pil Choi, Kyungmin Kim, & Arijit Mukherjee, “Sherlocking” and Information Design by Hybrid Platforms, SSRN (2023), https://ssrn.com/abstract=4332558 (the model assumes that the platform chooses its referral fee at the beginning of the game and that the cost of entry is the same for both the seller and the platform).

[80] Radostina Shopova, Private Labels in Marketplaces, 89 International Journal of Industrial Organization 102949 (2023), (the model assumes that the market structure is given exogenously and that the quality of the seller’s product is also exogenous; therefore, the paper does not investigate how entry by a platform affects the innovation incentives of third-party sellers).

[81] Jean-Pierre Dube?, Amazon Private Brands: Self-Preferencing vs Traditional Retailing, SSRN (2022) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4205988.

[82] Gregory S. Crawford, Matteo Courthoud, Regina Seibel, & Simon Zuzek, Amazon Entry on Amazon Marketplace, CEPR Discussion Paper No. 17531 (2022), https://cepr.org/publications/dp17531.

[83] Motta & Shelegia, supra note 68.

[84] Jingcun Cao, Avery Haviv, & Nan Li, The Spillover Effects of Copycat Apps and App Platform Governance, SSRN (2023), https://ssrn.com/abstract=4250292.

[85] Massimo Motta, Self-Preferencing and Foreclosure in Digital Markets: Theories of Harm for Abuse Cases, 90 International Journal of Industrial Organization 102974 (2023).

[86] Id.

[87] Id.

[88] See, e.g., Crawford, Courthoud, Seibel, & Zuzek, supra note 82; Etro, supra note 78; Shopova, supra note 80.

[89] Motta, supra note 85.

[90] Servizio Elettrico Nazionale, supra note 55, paras. 53-54; Post Danmark II, supra note 55, para. 65.

[91] Etro, supra note 78; see also Herbert Hovenkamp, The Looming Crisis in Antitrust Economics, 101 Boston University Law Review 489 (2021), 543, (arguing that: “Amazon’s practice of selling both its own products and those of rivals in close juxtaposition almost certainly benefits consumers by permitting close price comparisons. When Amazon introduces a product such as AmazonBasics AAA batteries in competition with Duracell, prices will go down. There is no evidence to suggest that the practice is so prone to abuse or so likely to harm consumers in other ways that it should be categorically condemned. Rather, it is an act of partial vertical integration similar to other practices that the antitrust laws have confronted and allowed in the past.”)

[92] On the more complex economic rationale of intellectual property, see, e.g., William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law, Cambridge, Harvard University Press (2003).

[93] See, e.g., Italian Competition Authority, 18 Jul. 2023 No. 30737, Case A538 – Sistemi di sigillatura multidiametro per cavi e tubi, (2023) Bulletin No. 31.

[94] See CJEU, 6 Apr. 1995, Joined Cases C-241/91 P and 242/91 P, RTE and ITP v. Commission, ECLI:EU:C:1995:98; 29 Apr. 2004, Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. GH, ECLI:EU:C:2004:257; General Court, 17 Sep. 2007, Case T-201/04, Microsoft v. Commission, ECLI:EU:T:2007:289; CJEU, 16 Jul. 2015, Case C-170/13, Huawei Technologies Co. Ltd v. ZTE Corp., ECLI:EU:C:2015:477.

[95] See, e.g., Dana Mattioli, How Amazon Wins: By Steamrolling Rivals and Partners, Wall Street Journal (2022), https://www.wsj.com/articles/amazon-competition-shopify-wayfair-allbirds-antitrust-11608235127; Aditya Kalra & Steve Stecklow, Amazon Copied Products and Rigged Search Results to Promote Its Own Brands, Documents Show, Reuters (2021), https://www.reuters.com/investigates/special-report/amazon-india-rigging.

[96] Williams-Sonoma, Inc. v. Amazon.Com, Inc., Case No. 18-cv-07548 (N.D. Cal., 2018). The suit was eventually dismissed, as the parties entered into a settlement agreement: Williams-Sonoma, Inc. v. Amazon.Com, Inc., Case No. 18-cv-07548-AGT (N.D. Cal., 2020).

[97] Amazon Best Sellers, https://www.amazon.com/Best-Sellers/zgbs.

[98] Hovenkamp, supra note 91, 2015-2016.

[99] Nicolas Petit, Big Tech and the Digital Economy, Oxford, Oxford University Press (2020), 224-225.

[100] For a recent analysis, see Zijun (June) Shi, Xiao Liu, Dokyun Lee, & Kannan Srinivasan, How Do Fast-Fashion Copycats Affect the Popularity of Premium Brands? Evidence from Social Media, 60 Journal of Marketing Research 1027 (2023).

[101] Lina M. Khan, Amazon’s Antitrust Paradox, 126 Yale Law Journal 710 (2017), 782.

[102] See Massimo Motta &Martin Peitz, Intervention Triggers and Underlying Theories of Harm, in Market Investigations. A New Competition Tool for Europe? (M. Motta, M. Peitz, & H. Schweitzer, eds.), Cambridge, Cambridge University Press (2022), 16, 59 (arguing that, while it is unclear to what extent products or ideas are worth protecting and/or can be protected from sherlocking and whether such cloning is really harmful to consumers, this is clearly an area where an antitrust investigation for abuse of dominant position would not help).

[103] Khan, supra note 101, 780 and 783 (arguing that Amazon’s conflicts of interest tarnish the neutrality of the competitive process and that the competitive implications are clear, as Amazon is exploiting the fact that some of its customers are also its rivals).

[104] Servizio Elettrico Nazionale, supra note 55, para. 85.

[105] Post Danmark I, supra note 55, para. 22.

[106] Iba?n?ez Colomo, supra note 55, 21-22.

[107] Id.

[108] See, e.g., DMA, supra note 4, Recital 5 (complaining that the scope of antitrust provisions is “limited to certain instances of market power, for example dominance on specific markets and of anti-competitive behaviour, and enforcement occurs ex post and requires an extensive investigation of often very complex facts on a case by case basis.”).

[109] U.S. Federal Trade Commission, et al. v. Amazon.com, Inc., supra note 23.

[110] Khan, supra note 101.

[111] Khan, supra note 22, 1003, referring to Amazon, Google, and Meta.

Back in February 2022, the Federal Trade Commission (FTC) announced an advance notice of proposed rulemaking (ANPRM) on “deceptive or unfair earnings claims.” According to the FTC…

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ICLE Academic Affiliate Thomas Hazlett was a guest on CNBC’s Squawk Box to discuss his recent Wall Street Journal op-ed arguing that mergers often have consumer benefits. Video of the clip is embedded below.

ICLE Chief Economist Brian Albrecht was a guest on the Lead-Lag Live podcast to discuss the issues of market concentration, inflation, and the role of “superstar” firms in the economy. Audio of the full episode is embedded below.

Once again, a major competition agency, the European Commission, appears poised to take an anticompetitive enforcement action—in this case, blocking Amazon’s acquisition of consumer robotic-manufacturer iRobot.

Read the full piece here.

I. About the International Center for Law & Economics

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center founded with the goal of building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies to inform public-policy debates and has longstanding expertise in the evaluation of antitrust law and policy.

ICLE’s interest is to ensure that antitrust law remains grounded in clear rules, established precedent, a record of evidence, and sound economic analysis. Some of the proposals in the Competition Taskforce’s Reform Consultation (“Consultation”) threaten to erode such foundations by, among other things, shifting toward merger analysis that focuses on the number of competitors, rather than the impact on competition, as well as reversing the burden of proof; curtailing rights of defense; and adopting an unduly strict approach to mergers in particular sectors. Our overriding concern is that intellectually coherent antitrust policy must focus on safeguarding competition and the interests of consumers.

In its ongoing efforts to contribute to ensuring that antitrust law in general, and merger control in particular, remain tethered to sound principles of economics, law, and due process, ICLE has submitted responses to consultations and published papers, articles, and reports in a number of jurisdictions, including the European Union, the United States, Brazil, the Republic of Korea, the United Kingdom, and India. These and other publications are available on ICLE’s website.[1]

II. Summary of Key Points

We appreciate the opportunity to comment on the Competition Taskforce’s Consultation. Our comments below mirror the structure of the main body of the Consultation. Section by section, we suggest improvements to the Consultation’s approach, as well as citing background law and economics that we believe the Treasury should keep in mind as it considers whether to move forward with merger reform in Australia.

• Question 6 — Australia should not skew its merger regime toward blocking mergers under conditions of uncertainty. Uncertainty is endemic in merger control. Since the vast majority of mergers are procompetitive—including mergers in what is commonly called the “digital sector”—an error-cost-analysis approach would suggest that false negatives are preferable to false positives. Concrete evidence of a likely substantial lessening of competition post-merger should continue to be the decisive factor in decisions to block a merger, not uncertainty about its effects.
• Question 8 — While potential competition and so-called “killer acquisitions” are important theories for the Australian Competition and Consumer Commission (“ACCC”) to consider when engaging in merger review, neither suggest that the burden of proof needed to reject a merger should be changed, nor do they warrant an overhaul of the existing merger regime. Furthermore, given the paucity of evidence finding “killer acquisitions” in the real world, it is highly unlikely that any economic woes that Australia currently faces can be blamed on an epidemic of killer acquisitions or acquisitions of potential/nascent competitors. If the Treasury is going to adopt any rules to address these theories of harm, it should do so in a manner consistent with the error-cost framework (see reply to Question 6) and should not undercut the benefits and incentives that startup firms derive from the prospect of being acquired by a larger player.
• Question 9 — Merger control should remain tethered to the analysis of competitive effects within the framework of the significant lessening of competition test (“SLC test”), rather than seeking to foster any particular market structure. Market structure is, at best, an imperfect proxy for competitive effects and, at worst, a deeply misleading one. As such, it should remain just one tool among many in merger analysis, rather than an end in itself.
• Question 13 — In deciding whether to impose a mandatory-notification regime, Australia should be guided by error-cost considerations, and not merely seek to replicate international trends. While there are sound reasons to prefer a system of mandatory-merger notifications, the Treasury cannot ignore the costs of filing mergers or of reviewing them. It should be noted that some studies suggest that voluntary merger notification may achieve objectives similar to those achieved by compulsory systems at lower cost to the merging parties, as well as to the regulator. If the Treasury nonetheless decides to impose mandatory notification, it should seek to contain unnecessary costs by setting a reasonable turnover threshold, thereby filtering out transactions with little-to-no potential for anticompetitive harm.
• Question 17 —Australian merger control should require that a decisionmaker be satisfied that a merger would likely and substantially lessen competition before blocking it, rather than effectively reversing the burden of proof by requiring that merging parties demonstrate that it would not. In a misguided attempt to shift the costs of erroneous decisions from the public to the merging parties, the ACCC’s proposal forgets that false positives also impose costs on the public, most notably in the form of foregone consumer benefits. In addition, since the vast majority of mergers are procompetitive, including mergers in the digital sector, there is no objective empirical basis for reversing the burden of proof along the proposed lines.
• Question 18 — The SLC test should not be amended to include acquisitions that “entrench, materially increase or materially extend a position of substantial market power.” First, the Consultation seems to conflate instances of anticompetitive leveraging with cases where an incumbent in one market enters an adjacent one. The latter is a powerful source of competition and, as such, should not be curtailed. The former is already covered by the SLC test, which equips authorities with sufficient tools to curb the misuse of market power post-merger. Third, it is unclear what the term “materially” would mean in the proposed context, or what it would add to the SLC test. Australian merger control already interprets “substantial” lessening of competition to mean “material in a relative sense and meaningful.” Thus, the term “materially” risks injecting unnecessary uncertainty and indeterminacy into the system.
• Question 19 — As follows from our response to Question 9, Section 50(3) should not be amended to yield an increased focus on changes to market structure as a result of a merger. It is also unclear what is gained from removing the factors in Section 50(3). More than a “modernization” (as the Consultation calls it), this appears to be a redundancy, as the listed factors already significantly overlap with those commonly used under the SLC test. To the extent that these factors place a “straitjacket” on courts (though in principle they are sufficiently broad and flexible), they could be removed, however, so long as merger analysis remained tethered to the SLC test and respects its overarching logic.
• Question 20 — Non-competition public benefits should play a limited role in merger control. Competition authorities are, in principle, ill-suited to rank, weigh, and prioritize complex and incommensurable goals and values. The injection of public-benefits analysis into merger review magnifies the risk of discretionary and arbitrary decision making.

III. Consultation Responses

A.   Question 6

Is Australia’s merger regime ‘skewed towards clearance’? Would it be more appropriate for the framework to skew towards blocking mergers where there is sufficient uncertainty about competition impacts?

In order for a merger to be blocked in Australia, it must be demonstrated that the merger is likely to substantially lessen competition. In the context of Section 50, “likely” means a “real commercial likelihood.”[2] Furthermore, a “substantial” lessening of competition need not be “large or weighty… but one that is ‘real or of substance… and thereby meaningful and relevant to the competitive process.’”[3] This does not set an inordinately high bar for authorities to clear.

In a sense, however, the ACCC is right when it says that Australian merger control is “skewed towards clearance.”[4] This is because all merger regimes are “skewed” toward clearance. Even in jurisdictions that require mandatory notifications, only a fraction of mergers—typically, those above a certain turnover threshold—are examined by competition authorities. Only a small percentage of these transactions are subject to conditional approval, and an even smaller percentage still are blocked or abandoned.[5] This means that the vast majority of mergers are allowed to proceed as intended by the parties, and for good reason. As the ACCC itself and the Consultation note, most mergers do not raise competition concerns.[6]

But while partially accurate, this statement is only half true. Most mergers are, in fact, either benign or procompetitive. Indeed, mergers are often an effective way to reduce transaction costs and generate economies of scale in production,[7] which can enable companies to bolster innovation post-merger. According to Robert Kulick and Andrew Card, mergers are responsible for increasing research and development expenditure by as much as $13.5 billion annually.[8] And as Francine Lafontaine and Margaret Slade point out in the context of vertical mergers:

In spite of the lack of unified theory, over all a fairly clear empirical picture emerges. The data appear to be telling us that efficiency considerations overwhelm anticompetitive motives in most contexts. Furthermore, even when we limit attention to natural monopolies or tight oligopolies, the evidence of anticompetitive harm is not strong. [9]

While vertical mergers are generally thought to be less likely to harm competition, this does not cast horizontal mergers in a negative light. It is true that the effects of horizontal mergers are empirically less well-documented. But while there is some evidence that horizontal mergers can reduce consumer welfare, at least in the short run, the long-run effects appear to be strongly positive. Dario Focarelli and Fabio Panetta find:

…strong evidence that, although consolidation does generate adverse price changes, these are temporary. In the long run, efficiency gains dominate over the market power effect, leading to more favorable prices for consumers.[10]

Furthermore, and in line with the above, some studies have found that horizontal merger enforcement has even harmed consumers.[11]

It is therefore only natural that merger regimes should be “skewed” toward clearance. But this is no more a flaw of the system than is the presumption that cartels are harmful. Instead, it reflects the well-documented and empirically grounded insight that most mergers do not raise competition concerns and that there are myriad legitimate, procompetitive reasons for firms to merge.[12]

It also reflects the principle that, since errors are inevitable, merger control should prefer Type II over Type I errors. Indeed, legal decision making and enforcement under uncertainty are always difficult and always potentially costly.[13] Given the limits of knowledge, there is always a looming risk of error.[14] Where enforcers or judges are trying to ascertain the likely effects of a business practice, such as a merger, their forward-looking analysis will seek to infer anticompetitive conduct from limited information.[15] To mitigate risks, antitrust law, generally, and merger control, specifically, must rely on certain heuristics to reduce the direct and indirect costs of the error-cost framework,[16] whose objective is to ensure that regulatory rules, enforcement decisions, and judicial outcomes minimize the expected cost of (1) erroneous condemnation and deterrence of beneficial conduct (“false positives,” or “Type I errors”); (2) erroneous allowance and under-deterrence of harmful conduct (“false negatives,” or “Type II errors”); and (3) the costs of administering the system.

Accordingly, “skewing” the merger-analysis framework toward blocking mergers could, in theory, be appropriate where the enforcer or the courts knew that mergers are always or almost always harmful (as in the case of, e.g., cartels). But we have already established that the opposite is, in fact, true: most mergers are either benign or procompetitive. The Consultation’s caveat that this would apply only in cases where “there is sufficient uncertainty about competition impacts” does not carve out a convincing exception to this principle. This is particularly true given that, in a forward-looking exercise, there is, by definition, always some degree of uncertainty about future outcomes. Given that most mergers are procompetitive or benign, any lingering uncertainty should, in any case, be resolved in favor of allowing a merger, not blocking it.

Concrete evidence of a likely substantial lessening of competition post-merger should therefore continue to be the decisive factor in decisions to block a merger, not uncertainty about its effects (see also the response to Question 17). Under uncertainty, the error-cost framework when applied to antitrust leads in most cases to a preference of Type II over Type I errors, and mergers are no exception.[17] The three main reasons can be summarized as follows. First, “mistaken inferences and the resulting false condemnations are especially costly, because they often chill the very conduct the antitrust laws are designed to protect.”[18] The aforementioned procompetitive benefits of mergers, coupled with the general principle that parties should have the latitude in a free-market economy to buy and sell to and from whomever they choose, are cases in point. Second, false positives may be more difficult to correct, especially in light of the weight of judicial precedent.[19] Third, the costs of a wrongly permitted monopoly are small compared to the costs of competition wrongly condemned.[20] As Lionel Robbins once said: monopoly tends to break, tariffs tend to stick.[21] The same is applicable to prohibited mergers.

In sum, Australia should not skew its merger regime toward blocking mergers under uncertainty.

B.   Question 8

Is there evidence of acquisitions by large firms (such as serial or creeping acquisitions, acquisitions of nascent competitors, ‘killer acquisitions’, and acquisitions by digital platforms) having anti-competitive effects in Australia?

We do not know whether there have been any such cases in Australia. We would, however, like to offer more general commentary on the relevance of nascent competition and killer acquisitions in the context of merger control, especially as concerns digital platforms.

One of the most important concerns about acquisitions by the major incumbent tech platforms is that they can be used to eliminate potential competitors that currently do not compete, but could leverage their existing network to compete in the future—a potential that incumbents can better identify than can competition enforcers.[22]

As the Furman Review states:

In mergers involving digital companies, the harms will often centre around the loss of potential competition, which the target company in an adjacent market may provide in the future, once their services develop.[23]

Similar concerns have been raised in the Stigler Report,[24] the expert report commissioned by Commissioner Margrethe Vestager for the European Commission,[25] and in the ACCC’s own Fifth Interim Report of the Digital Platform Services Inquiry.[26] Facebook’s acquisition of Instagram is frequently cited as a paradigmatic example of this phenomenon.

There are, however, a range of issues with using this concern as the basis for a more restrictive merger regime. First, while doubtless this kind of behavior is a risk, and competition enforcers should weigh potential competition as part of the range of considerations in any merger review, potential-competition theories often prove too much. If one firm with a similar but fundamentally different product poses a potential threat to a purchaser, there may be many other firms with similar, but fundamentally different, products that do, too.

If Instagram, with its photo feed and social features, posed a potential or nascent competitive threat to Facebook when Facebook acquired it, then so must other services with products that are clearly distinct from Facebook but have social features. In that case, Facebook faces potential competition from other services like TikTok, Twitch, YouTube, Twitter (X), and Snapchat, all of which have services that are at least as similar to Facebook’s as Instagram’s. In this case, the loss of a single, relatively small potential competitor out of many cannot be counted as a significant loss for competition, since so many other potential and actual competitors remain.

The most compelling version of the potential and nascent competition argument is that offered by Steven Salop, who argues that since a monopolist’s profits will tend to exceed duopolists’ combined profits, a monopolist will normally be willing and able to buy a would-be competitor for more than the competitor would be able to earn if it entered the market and competed directly, earning only duopoly profits.[27]

While theoretically elegant, this model has limited use in understanding real-world scenarios. First, it assumes that entry is only possible once—i.e., that after a monopolist purchases a would-be competitor, it can breathe easy. But if repeat entry is possible, such that another firm can enter the market at some point after an acquisition has taken place, the monopolist will be engaged in a potentially endless series of acquisitions, sharing its monopoly profits with a succession of would-be duopolists until there is no monopoly profit left.

Second, the model does not predict what share of monopoly profits would go to the entrant, as compared to the monopolist. The entrant could hold out for nearly all of the monopolist’s profit share, adjusted for the entrant’s expected success in becoming a duopolist.

Third, apart from being a poor strategy for preserving monopoly profits—since these may largely accrue to the entrants, under this model—this could lead to stronger incentives for entry than in a scenario where the duopolists were left to compete with one another, leading to more startup formation and entry overall.

Finally, acquisitions of potential competitors, far from harming competition, often benefit consumers. The acquisition of Instagram by Facebook, for example, brought the photo-editing technology that Instagram had developed to a much larger market of Facebook users, and provided those services with a powerful monetization mechanism that was otherwise unavailable to Instagram.[28] As Ben Sperry has written:

Facebook has helped to build Instagram into the product it is today, a position that was far from guaranteed, and that most of the commentators who mocked the merger did not even imagine was possible. Instagram’s integration into the Facebook platform in fact did benefit users, as evidenced by the rise of Instagram and other third-party photo apps on Facebook’s platform.[29]

In other words, many supposedly anticompetitive acquisitions appear that way only because of improvements made to the acquired business by the acquiring platform.[30]

As for “killer acquisitions,” this refers to scenarios in which incumbents acquire a firm just to shut down pipelines of products that compete closely with their own. By eliminating these products and research lines, it is feared that “killer acquisitions” could harm consumers by eliminating would-be competitors and their products from the market, and thereby eliminating an innovative rival. A recent study by Marc Ivaldi, Nicolas Petit, and Selçukhan Ünekbas, however, recommends caution surrounding the killer acquisition “hype.” First, despite the disproportionate attention they have been paid in policy circles, “killer acquisitions” are an exceedingly rare phenomenon. In pharmaceuticals, where the risk is arguably the highest, it is they account for between 5.3% and 7.4% of all acquisitions, while in digital markets, the rate is closer to 1 in 175.[31] The authors ultimately find that:

Examining acquisitions by large technology firms in ICT industries screened by the European Commission, [we find] that acquired products are often not killed but scaled, post-merger industry output demonstrably increases, and the relevant markets remain dynamic post-transaction. These findings cast doubt on contemporary calls for tightening of merger control policies.[32]

Thus, acquisitions of potential competitors and smaller rivals more often than not lead to valuable synergies, efficiencies, and the successful scaling of products and integration of technologies.

But there is an arguably even more important reason why the ACCC should not preventively restrict companies’ ability to acquire smaller rivals (or potential rivals). To safeguard incentives to invest and innovate, it is essential that buyouts remain a viable “way out” for startups and small players. As ICLE has argued previously:

Venture capitalists invest on the understanding that many of the businesses in their portfolio will likely fail, but that the returns from a single successful exit could be large enough to offset any failures. Unsurprisingly, this means that exit considerations are the most important factor for VCs when valuing a company. A US survey of VCs found 89% considered exits important and 48% considered it the most important factor. This is particularly important for later-stage VCs.”[33] (emphasis added)

Indeed, the “killer” label obfuscates the fact that acquisitions are frequently a desired exit strategy for founders, especially founders of startups and small companies. Investors and entrepreneurs hope to make money from the products into which they are putting their time and money. While that may come from the product becoming wildly successful and potentially displacing an incumbent, this outcome can be exceedingly difficult to achieve. The prospect of acquisition increases the possibility that these entrepreneurs can earn a return, and thus magnifies their incentives to build and innovate.[34]

In sum, while potential competition and so-called killer acquisitions are important theories for the ACCC to consider when engaging in merger review, neither theory suggests that the burden of proof needed to reject a merger should be changed, much less warranting an overhaul of the existing merger regime. Furthermore, given the paucity of “killer acquisitions” in the real world, it is highly unlikely that any economic woes that Australia currently faces are due to an epidemic of killer acquisitions or acquisitions of potential/nascent competitors. Indeed, a recent paper by Jonathan Barnett finds the concerns around startup acquisitions to have been vastly exaggerated, while their benefits have been underappreciated:

A review of the relevant body of evidence finds that these widely-held views concerning incumbent/startup acquisitions rest on meager support, confined to ambiguous evidence drawn from a small portion of the total universe of acquisitions in the pharmaceutical market and theoretical models of acquisition transactions in information technology markets. Moreover, the emergent regulatory and scholarly consensus fails to take into account the rich body of evidence showing the critical function played by incumbent/startup acquisitions in supplying a monetization mechanism that induces venture-capital investment and promotes startup entry in technology markets.

In addition:

Proposed changes to merger review standards would disrupt these efficient transactional mechanisms and are likely to have counterproductive effects on competitive conditions in innovation markets.[35]

Accordingly, if the Treasury is going to adopt any rules to address these theories of harm, it should do so in a way consistent with the error-cost framework (see reply to Question 6); that does not undercut the benefits and incentives that derive from the prospect of acquisition by a larger player; and that accurately reflects the real (modest) anticompetitive threat posed by killer acquisitions, rather than one animated by dystopic hyperbole.[36]

C.   Question 9

Should Australia’s merger regime focus more on acquisitions by firms with market power, and/or the effect of the acquisitions on the overall structure of the market?

Merger control should remain tethered to analysis of competitive effects within the framework of the SLC test, rather than on fostering any particular market structure. Market structure is, at best, an imperfect proxy for competitive effects and, at worst, a misleading one. As such, it should be considered just one tool among many for scrutinizing mergers, not an end in itself.

To start, the assumption that “too much” concentration is harmful presumes both that the structure of a market is what determines economic outcomes, and that anyone knows what the “right” amount of concentration is.[37] But as economists have understood since at least the 1970s, (despite an extremely vigorous, but ultimately futile, effort to show otherwise), market structure is not outcome determinative.[38] As Harold Demsetz has written:

Once perfect knowledge of technology and price is abandoned, [competitive intensity] may increase, decrease, or remain unchanged as the number of firms in the market is increased.… [I]t is presumptuous to conclude… that markets populated by fewer firms perform less well or offer competition that is less intense.[39]

This view is well-supported, and held by scholars across the political spectrum.[40] To take one prominent recent example, professors Fiona Scott Morton (deputy assistant attorney general for economics in the U.S. Justice Department Antitrust Division under President Barack Obama), Martin Gaynor (former director of the Federal Trade Commission Bureau of Economics under President Obama), and Steven Berry surveyed the industrial-organization literature and found that presumptions based on measures of concentration are unlikely to provide sound guidance for public policy:

In short, there is no well-defined “causal effect of concentration on price,” but rather a set of hypotheses that can explain observed correlations of the joint outcomes of price, measured markups, market share, and concentration.… Our own view, based on the well-established mainstream wisdom in the field of industrial organization for several decades, is that regressions of market outcomes on measures of industry structure like the Herfindahl Hirschman Index should be given little weight in policy debates.[41]

The absence of correlation between increased concentration and both anticompetitive causes and deleterious economic effects is also demonstrated by a recent, influential empirical paper by Shanat Ganapati. Ganapati finds that the increase in industry concentration in U.S. non-manufacturing sectors between 1972 and 2012 was “related to an offsetting and positive force—these oligopolies are likely due to technical innovation or scale economies. [The] data suggests that national oligopolies are strongly correlated with innovations in productivity.”[42] In the end, Ganapati found, increased concentration resulted from a beneficial growth in firm size in productive industries that “expand[s] real output and hold[s] down prices, raising consumer welfare, while maintaining or reducing [these firms’] workforces.”[43] Sam Peltzman’s research on increasing concentration in manufacturing finds that it has, on average, been associated with both increased productivity growth and widening margins of price over input costs. These two effects offset each other, leading to “trivial” net price effects.[44]

Further, the presence of harmful effects in industries with increased concentration cannot readily be extrapolated to other industries. Thus, while some studies have plausibly shown that an increase in concentration in a particular case led to higher prices (although this is true in only a minority of the relevant literature), assuming the same result from an increase in concentration in other industries or other contexts is simply not justified:

The most plausible competitive or efficiency theory of any particular industry’s structure and business practices is as likely to be idiosyncratic to that industry as the most plausible strategic theory with market power.[45]

As Chad Syverson recently summarized:

Perhaps the deepest conceptual problem with concentration as a measure of market power is that it is an outcome, not an immutable core determinant of how competitive an industry or market is… As a result, concentration is worse than just a noisy barometer of market power. Instead, we cannot even generally know which way the barometer is oriented.[46]

In other words, depending on the nature and dynamics of the market, competition may well be protected under conditions that preserve a certain number of competitors in the relevant market. But competition may also be protected under conditions in which a single winner takes all on the merits of their business.[47] It is reductive, and bad policy, to presume that a certain number of competitors is always and everywhere conducive to better economic outcomes, or indicative of anticompetitive harm.

This does not mean that concentration measures have no use in merger enforcement. Instead, it demonstrates that market concentration is often unrelated to antitrust enforcement because it is driven by factors that are endogenous to each industry. In revamping its merger-control rules, Australia should be careful not to rely too heavily on structural presumptions based on concentration measures, as these may be poor indicators of those cases where antitrust enforcement would be most beneficial to consumers.

In sum, market structure should remain only a proxy for determining whether a transaction significantly lessens competition. It should not be at the forefront of merger review. And it should certainly not be the determining factor in deciding whether to block a merger.

D.   Question 13

Should Australia introduce a mandatory notification regime, and what would be the key considerations for designing notification thresholds?

The ACCC has argued that Australia is an “international outlier” in not requiring mandatory notification of mergers.[48] While it is true that most countries with merger-control rules also require mandatory notification of mergers when these exceed a certain threshold, there are also notable examples where this is not the case. For example, the United Kingdom, one of the leading competition jurisdictions in the world, does not require mandatory notification of mergers.

In deciding whether to impose a mandatory-notification regime and accompanying notification thresholds, Australia should not—as a matter of principle—be guided by international trends. International trends may be a useful indicator, but they can also be misleading. Instead, Australia’s decision should be informed by close analysis of error costs. In particular, Australia should seek to understand how a notification regime would affect the balance between Type I and Type II errors in this context. A notification regime would presumably reduce false negatives without necessarily increasing false positives, which is a good outcome.

In its calculation, however, the Treasury cannot ignore the costs of filing mergers and of reviewing them. If designed poorly, mandatory notifications can be a burden for the merging firms, for third parties, and for the reviewing authorities, siphoning resources that could be better deployed elsewhere. It is here where a voluntary-notification regime could have an edge over the alternative. For instance, a study by Chongwoo Choe comparing systems of compulsory pre-merger notification with the Australian system of voluntary pre-merger notification found that:

Thanks to the signaling opportunity that arises when notification is voluntary, voluntary notification leads to lower enforcement costs for the regulator and lower notification costs for the merging parties. Some of the theoretical predictions are supported by exploratory empirical tests using merger data from Australia. Overall, our results suggest that voluntary merger notification may achieve objectives similar to those achieved by compulsory systems at lower costs to the merging parties as well as to the regulator.[49] (emphasis added).

If the Treasury nonetheless decides to mandate merger notification, the next step would be to establish a notification threshold, as it is evident that not all mergers can, or should, be notified to the Australian authorities. Indeed, many mergers may be patently uninteresting from a competition perspective (e.g., one small supermarket in Perth buying another), while others might not have a significant nexus with Australia (e.g., where an international company that does modest business in Australia buys a shop in Spain).[50] Too many merger notifications strain the public’s limited resources and disproportionately affect smaller companies, as these companies are less capable of covering administrative costs and filing fees. To mitigate such unnecessary costs, the Treasury should establish reasonable thresholds that help filter out transactions where the merging parties are unlikely to have significant market power post-merger.

But what constitutes a reasonable threshold? Our view is that there is no need to reinvent the wheel here. Turnover has typically been used as a proxy for a merger’s competitive impact because it offers a first indicator of the parties’ relative position on the market. Despite the Consultation’s claim that “mergers of all sizes are potentially capable of raising competition concerns,”[51] where the parties (and especially the target company) have either no or only negligible turnover in Australia, it is highly unlikely that the merger will significantly lessen competition. If the Treasury decides to impose mandatory notification for mergers, it should therefore consider using a turnover-based threshold.

E.    Question 17

Should Australia’s merger control regime require the decision-maker to be satisfied that a proposed merger:

• would be likely to substantially lessen competition before blocking it; or

• would not be likely to substantially lessen competition before clearing it?

The second option would essentially reverse the burden of proof in merger control. Instead of requiring the authority to prove that a merger would substantially lessen competition, it would fall on the merging parties to prove a negative—i.e., that the merger would not be likely to substantially lessen competition.

The ACCC has made this proposal because it:

Means that the risk of error is borne by the merger parties rather than the public. In the cases where this difference matters (for example where there is uncertainty or a number of possible future outcomes), the default position should be to leave the risk with the merger parties, not to put at risk the public interest in maintaining the state of competition into the future.[52]

The Consultation sympathizes. It recognizes that “there are trade-offs between the risks of false positives and false negatives in designing a merger test,” but contends that, while both lead to lower output, higher prices, lower quality, and less innovation, “allowing anti-competitive mergers means that merging parties benefit at the expense of consumers.”[53]

But this argument is based on a flawed premise. The risk of error—whether Type I or Type II error—is always borne by the public. The public is harmed by false positives in at least two ways. First, and most directly, it suffers harm through the foregone benefits that could have accrued from a procompetitive merger. As we have shown in our responses to Questions 6, 8, and 9, these benefits are common and can be economically substantial. Second, but no less important, false positives chill merger activity and discourage future mergers. This also negatively affects the public.

The extent to which chilling merger activity harms the public has, however, been obfuscated by a contrived dichotomy between “the public” and the merging parties, which taints the ACCC’s argumentation and skews the Conclusion. The merging parties are also part of society and, therefore, also part of “the public.” An unduly restrictive merger regime that prioritizes avoiding false negatives over false positives harms consumers. But it also harms the “public” more broadly, insofar as anyone could, potentially, have a direct interest in a merger, either as a stakeholder or a party to that merger.

In addition, a regime that requires companies to prove that a deal is not harmful (with the usual caveats about the difficulty of proving a negative) before being allowed to proceed unduly restricts economic freedom and the rights of defense—both of which are very “public” benefits, as everyone, in principle, benefits from them. These elements should also be taken into consideration when weighing the costs and benefits of Type I and Type II errors. That balancing test should, in our view, generally favor false negatives, as argued in our response to Question 6.

Finally, there is no objective, material justification for “[shifting] the default position from allowing mergers to proceed where there is uncertainty [which is, by definition, always in a merger review process that is forward-looking] to a position where, if there is sufficient uncertainty about the effects of a merger, it would not be cleared.” As discussed in our answer to Question 6, the vast majority of mergers are procompetitive, including mergers in the digital sector, or mergers that involve digital platforms. This presumption is reflected in the requirement, common across antitrust jurisdictions, that enforcers must make a prima facie case that a merger will be anticompetitive before the merging parties have a duty to respond. There has been no major empirical finding or theoretical revelation in recent years that would justify reversing this burden of proof. Indeed, any change along these lines would be guided by ephemeral political and industrial-policy exigencies, rather than by robust principles of law and economics. In our view, these are not sound reasons for flipping merger review on its head.

In sum, Australian merger control should require that a decisionmaker be satisfied that a merger would be likely to substantially lessen competition before blocking it.

F.    Question 18

Should Australia’s substantial lessening of competition test be amended to include acquisitions that ‘entrench, materially increase or materially extend a position of substantial market power’?

According to the ACCC:

Under the current substantial lessening of competition test, it may be difficult to stop acquisitions that lead to a dominant firm extending their market power into related or adjacent markets.[54]

The ACCC imagines this is a problem, particularly in digital markets. Preventing dominant firms from leveraging their market power in one market to restrict competition in an adjacent one is a legitimate concern. We should, however, be clear about what is meant by “materially increase or materially extend a position of substantial market power.”

Merger control should not, as a matter of principle, seek to prevent incumbents from entering adjacent markets. Large firms moving into the core business of competitors from adjacent markets often represents the biggest source of competition for incumbents, as it is often precisely these firms who have the capacity to contest competitors’ dominance in their core businesses effectively. This scenario is prevalent in digital markets, where incumbents must enter multiple adjacent markets, most often by supplying highly differentiated products, complements, or “new combinations” of existing offerings.[55]

Moreover, it is unclear why the SLC test in its current state is insufficient to curb the misuse of market power. The SLC test is a standard used by regulatory authorities to assess the legality of proposed mergers and acquisitions. Simply put, it examines whether a prospective merger is likely to substantially lessen competition in a given market, with the purpose of preventing mergers that increase prices, reduce output, limit consumer choice, or stifle innovation as a result of a decrease in competition.

The SLC test is one of the two major tests deployed by competition authorities to determine whether a merger is anticompetitive, the other being the dominance test. Most merger-control regimes today use the SLC test, and for two good reasons. The first is that, under the dominance test, it is difficult to assess coordinated effects and non-horizontal mergers.[56] The other, mentioned in the Consultation, is that the SLC test allows for more robust effects-based economic analysis.[57]

The SLC test examines likely coordinated and non-coordinated effects in all three types of mergers: horizontal, vertical, and conglomerate. Horizontal mergers may substantially lessen competition by eliminating a significant competitive constraint on one or more firms, or by changing the nature of competition such that firms that had not previously coordinating their behavior will be more likely to do so. Vertical and conglomerate mergers tend to pose less of a risk to competition.[58] Still, there are facts and circumstances under which they can substantially lessen competition by, for example, foreclosing rivals from necessary inputs, supplies, or markets. These outcomes will often be associated with an increase in market power. As the OECD has written:

The focus of the SLC test lies predominantly on the impact of the merger on existing competitive constraints and on measuring market power post-merger.[59]

In other words, the SLC test already accounts for increases in market power that are capable and likely of harming competition. As to whether the “entrenchment” of market power—in line with the 2022 amendments to Canadian competition law—should be added to the SLC test, there is no reason to believe that this is either necessary or appropriate in the Australian context. The 2022 amendments to the Canadian competition law mentioned in the Consultation[60] largely align Canada’s merger control with its abuse-of-dominance provision, which prohibits anti-competitive activities that damage or eliminate competitors and that “preserve, entrench or enhance their market power.”[61] But in Australia, Section 46 (the equivalent of the Canadian abuse-of-dominance provision) prohibits conduct “that has the purpose, or has or is likely to have the effect, of substantially lessening competition.” The proposed amendment would thus create a discrepancy between merger control and Section 46, where the latter would remain tethered to an SLC test, and the former would shift to a new standard. Additionally, since it remains unclear what the results of Canada’s 2022 merger-control amendments have been or will be, it would be wiser for Australia to adopt a “wait and see” approach before rushing to replicate them.

Lastly, there is the question of defining “materiality” in the context of an increase or entrenchment of market power. Currently, Section 50 prohibits mergers that “substantially lessen competition,” with no mention of materiality.[62] The Merger Guidelines do, however, state that:

The term “substantial” has been variously interpreted as meaning real or of substance, not merely discernible but material in a relative sense and meaningful.[63] (emphasis added)

The proposed amendment follows suit, referring to the concepts of “material increase” and “material extension” of market power. What does this mean? How does a “material increase” in market power differ from a non-material one? In its comments to the American Innovation and Choice Online Act (“AICOA”), the American Bar Association’s Antitrust Law Section criticized the bill for using amorphous terms such as “fairness,” “preferencing,” and “materiality,” or the “intrinsic” value of a product. Because these concepts were not defined either in the legislation or in existing case law, the ABA argued that they injected variability and indeterminacy into how the legislation would be administered.[64] The same argument applies here.

Accordingly, the SLC test should not be amended to include acquisitions that “entrench, materially increase or materially extend a position of substantial market power.”

G.   Question 19

Should the merger factors in section 50(3) be amended to increase the focus on changes to market structure as a result of a merger? Or should the merger factors be removed entirely?

On market structure, see our responses to Question 9 and Question 18.

The merger factors under Section 50(3) already overlap with the factors typically used under the SLC test. These include the structure of related markets; the merger’s underlying economic rationale; market accessibility for potential entrants; the market shares of involved undertakings; whether the market is capacity constrained; the presence of competitors (existing and potential); consumer behavior (the willingness and ability of consumers to switch to alternative products); the likely effect on consumers; the financial investment required for market entry; and the market share necessary for a buyer or seller to achieve profitability or economies of scale.

Similarly, Section 50(3) contains a list of the factors to be considered under the SLC test, including barriers to entry, the intensity of competition on the market, the likely effects on price and profit margins, and the extent of vertical integration, among others. Structural questions, such as the degree of concentration on the market, are also one of the listed factors under Section 50(3).

As a result, it is unclear how eliminating the merger factors would transform the SLC test, or why there should be more emphasis on market structure (on the proper role of market structure in merger-control analysis, see our answers to Question 9 and Question 18).

In sum, Section 50(3) should not be amended to increase the focus on changes to market structure as a result of a merger. It is also not clear what is gained from removing the factors in Section 50(3). More than a “modernization” (as the Consultation calls it),[65] the change appears redundant. To the extent that these factors place a “straitjacket” on courts (though, in principle, they are broad enough to be sufficiently flexible), however, they could be removed, so long as merger analysis remains tethered to the SLC test.

H.  Question 20

 Should a public benefit test be retained if a new merger control regime was introduced?

Antitrust law, including merger control, is not a “Swiss Army knife.”[66] Public-interest considerations should generally have limited to no weight in merger analysis, except in extremely specific cases proscribed by the law (e.g., public security and defense considerations). Expanding merger analysis to encompass non-competition concerns risks undermining the rule of law, diminishing legal certainty, and harming consumers.

In Australia, the Competition Act currently does not expressly limit the range of public benefits (or detriments) that may be taken into account by the ACCC when deciding whether to block or allow a merger (this includes not limiting them to those that address market failure or improve economic efficiency).[67] Thus, “anything of value to the community generally, any contribution to the aims pursued by the society” could, in theory, be considered a public benefit for the purpose of the public-benefit test.[68] The authorization regime also does not require the ACCC to quantify the level of public benefits and detriments.

Competition authorities are, in principle, ill-suited to rank, weigh, and prioritize complex, incommensurable goals and values against one other. They lack the expertise to meaningfully evaluate political, social, environmental, and other goals. They are independent agencies with a strict, narrow mandate, not political decision makers tasked with redistributing wealth or guiding society forward. Requiring them to consider broad public considerations when deciding on mergers magnifies the risk of discretionary and arbitrary decision making and undercuts legal certainty. This is as true for blocking mergers on the basis of public detriments as it is for allowing them on the basis of public benefits. By contrast, the consumer-welfare standard, which forms the basis of the SLC, is properly understood as:

Offer[ing] a tractable test that is broad enough to contemplate a variety of evidence related to consumer welfare but also sufficiently objective and clear to cabin discretion and honor the principle of the rule of law. Perhaps most significantly, it is inherently an economic approach to antitrust that benefits from new economic learning and is capable of evaluating an evolving set of commercial practices and business models.[69]

Consequently, we recommend that the public-interest test be jettisoned from merger analysis, or at least very narrowly circumscribed, if a new merger-control regime is introduced in Australia.

I.      Question 24

What is the preferred option or combination of elements outlined above? What implementation considerations would need to be taken into account?

In our opinion, and based on the arguments espoused in this submission, the best options would be as follows:

[1] International Center for Law & Economics, https://laweconcenter.org.

[2] Australian Competition and Consumer Commission v Pacific National Pty Limited [2020] FCAFC 77, [246].

[3] Australian Competition and Consumer Commission v Pacific National Pty Limited [2020] FCAFC 77, [104].

[4] Outline to Treasury: ACCC’s Proposals for Merger Reform, Australian Competition and Consumer Commission (2023), 5, 8, available at https://www.accc.gov.au/system/files/accc-submission-on-preliminary-views-on-options-for-merger-control-process.pdf.

[5] For example, in the EU, 94% of mergers are cleared without commitments, whereas only about 6% are allowed with remedies, and less than 0.5% of mergers are blocked or withdrawn by the parties. See Joanna Piechucka, Tomaso Duso, Klaus Gugler, & Pauline Affeldt, Using Compensating Efficiencies to Assess EU Merger Policy, VoxEU (10 Jan. 2022), https://cepr.org/voxeu/columns/using-compensating-efficiencies-assess-eu-merger-policy.

[6] Consultation, 4; ACCC 2023: 2, point 8e.

[7] Ronald Coase, The Nature of the Firm, 4(16) Economica 386-405 (Nov. 1937).

[8] Robert Kulick & Andre Card, Mergers, Industries, and Innovation: Evidence from R&D Expenditure and Patent Applications, NERA Economic Consulting (Feb. 2023), available at https://www.uschamber.com/assets/documents/NERA-Mergers-and-Innovation-Feb-2023.pdf.

[9] Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45(3) Journal of Economic Literature 677 (Sep. 2007).

[10] Dario Focarelli & Fabio Panetta, Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits, 93(4) American Economic Review 1152 (Sep. 2003).

[11] B. Espen Eckbo & Peggy Wier, Antimerger Policy Under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis, 28(1) Journal of Law & Economics 121 (Apr. 1985).

[12] See, e.g., in the context of tech mergers: Sam Bowman & Sam Dumitriu, Better Together: The Procompetitive Effects of Mergers in Tech, The Entrepreneurs Network & International Center for Law & Economics (Oct. 2021), available at https://laweconcenter.org/wp-content/uploads/2021/10/BetterTogether.pdf.

[13] Geoffrey A. Manne, Error Costs in Digital Markets, in Joshua D. Wright & Douglas H. Ginsburg (eds.), The Global Antitrust Institute Report on the Digital Economy, 33-108 (2020).

[14] Robert H. Mnookin & Lewis Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88(5) Yale Law Journal 950-97, 968 (Apr. 1979).

[15] See, e.g., in the context of predatory pricing, Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89(2) Yale Law Journal 213-70 (Dec. 1979).

[16] Manne, supra note 13, at 34, 41.

[17] Id.

[18] Verizon Comm’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)).

[19] Frank H. Easterbrook, The Limits of Antitrust, 63(1) Texas Law Review 1-40, 2-3, 15-16 (Aug. 1984).

[20] Id., (“Other things equal, we should prefer the error of tolerating questionable conduct, which imposes losses over a part of the range of output, to the error of condemning beneficial conduct, which imposes losses over the whole range of output.”)

[21] Lionel Robbins, Economic Planning and International Order, 116, (1937).

[22] This section is adapted, in part, from Bowman & Dumitriu, supra note 12.

[23] Jason Furman, et al., Unlocking Digital Competition: Report of the Digital Competition Expert Panel (Mar. 2019), 98, available at https://assets.publishing.service.gov.uk/media/5c88150ee5274a230219c35f/unlocking_digital_competition_furman_review_web.pdf (“Furman Review”).

[24] Committee for the Study of Digital Platforms Market Structure and Antitrust Subcommittee Report, Stigler Center for the Study of the Economy and the State (2019), 75, 88, available at https://research.chicagobooth.edu/-/media/research/stigler/pdfs/market-structure—report-as-of-15-may-2019.pdf (“Stigler Report”).

[25] Yves-Alexandre de Motjoye, Heike Schweitzer, & Jacques Crémer, Competition Policy for the Digital Era, European Commission Directorate-General for Competition (2019), 110-112, https://op.europa.eu/en/publication-detail/-/publication/21dc175c-7b76-11e9-9f05-01aa75ed71a1/language-en.

[26] See Sections 3.2., 6.2.2. of the Digital Services Platform Inquiry of September 2022, which finds a “high risk of anticompetitive acquisitions by digital platforms,” available at https://www.accc.gov.au/system/files/Digital%20platform%20services%20inquiry.pdf.

[27] Steven Salop, Potential Competition and Antitrust Analysis: Monopoly Profits Exceed Duopoly Profits, Georgetown Law Faculty Publications and Other Works 2380 (Apr. 2021), available at https://scholarship.law.georgetown.edu/facpub/2380.

[28] Geoffrey A. Manne, et al., Comments of the International Center for Law & Economics on the FTC & DOJ Draft Merger Guidelines, International Center for Law & Economics (18 Sep. 2023), 38, available at https://laweconcenter.org/wp-content/uploads/2023/09/ICLE-Draft-Merger-Guidelines-Comments-1.pdf.

[29] Ben Sperry, Killer Acquisition of Successful Integration: The Case of the Facebook/Instagram Merger, The Hill (8 Oct. 2020), https://thehill.com/blogs/congress-blog/politics/520211-killer-acquisition-or-successful-integration-the-case-of-the.

[30] Sam Bowman & Geoffrey A. Manne, Killer Acquisitions: An Exit Strategy for Founders, International Center for Law & Economics (Jul. 2020), available at https://laweconcenter.org/wp-content/uploads/2020/07/ICLE-tldr-Killer-acquisitions_-an-exit-strategy-for-founders-FINAL.pdf.

[31] See Colleen Cunningham, Florida Ederer, & Song Ma, Killer Acquisitions, 129(3) Journal of Political Economy 649-702 (Mar. 2021); see also Axel Gautier & Joe Lamesch, Mergers in the Digital Economy 54 Information Economics and Policy 100890 (2 Sep. 2020).

[32] Marc Ivaldi, Nicolas Petit, & Selçukhan Ünekbas, Killer Acquisitions in Digital Markets May be More Hype than Reality, VoxEU (15 Sep. 2023), https://cepr.org/voxeu/columns/killer-acquisitions-digital-markets-may-be-more-hype-reality (“The majority of transactions triggered increasing levels of competition in their respective markets.”)

[33] Bowman & Dumitriu, supra note 12.

[34] Bowman & Manne, supra note 30.

[35] Jonathan Barnett, “Killer Acquisitions” Reexamined: Economic Hyperbole in the Age of Populist Antitrust, USC Class Research Paper 23-1 (28 Aug. 2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4408546.

[36] On the current wave of dystopian thinking in antitrust law, especially surrounding anything “digital,” see Dirk Auer & Geoffrey A. Manne, Antitrust Dystopia and Antitrust Nostalgia: Alarmist Theories of Harm in Digital Markets and their Origins, 28(4) George Mason Law Review 1281 (9 Sep. 2021).

[37] The response to this question is adapted from Manne, et al., supra note 28.

[38] See, e.g., Harold Demsetz, Industry Structure, Market Rivalry, and Public Policy, 16(1) Journal of Law & Economics 1-9 (Apr. 1973).

[39] See Harold Demsetz, The Intensity and Dimensionality of Competition, in Harold Demsetz, The Economics of the Business Firm: Seven Critical Commentaries 137, 140-41 (1995).

[40] Nathan Miller, et al., On the Misuse of Regressions of Price on the HHI in Merger Review, 10(2) Journal of Antitrust Enforcement 248-259 (28 May 2022).

[41] Steven Berry, Martin Gaynor, & Fiona Scott Morton, Do Increasing Markups Matter? Lessons from Empirical Industrial Organization, 33(3) Journal of Economic Perspectives 44-68, 48 (2019).

[42] Shanat Ganapati, Growing Oligopolies, Prices, Output, and Productivity, 13(3) American Economic Journal: Microeconomics 309-327, 324 (Aug. 2021).

[43] Id., 309.

[44] Sam Peltzman, Productivity, Prices and Productivity in Manufacturing: a Demsetzian Perspective, Coase-Sandor Working Paper Series in Law and Economics 917, (19 Jul. 2021).

[45] Timothy F. Bresnahan, Empirical Studies of Industries with Market Power, in Richard Schmalensee & Robert Willig (eds.), Handbook of Industrial Organization, 1011, 1053-54 (1989).

[46] Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions, 33(3) Journal of Economic Perspectives 23-43, 26 (2019).

[47] Nicolas Petit & Lazar Radic, The Necessity of the Consumer Welfare Standard in Antitrust Analysis, ProMarket (18 Dec. 2023), https://www.promarket.org/2023/12/18/the-necessity-of-a-consumer-welfare-standard-in-antitrust-analysis.

[48] ACCC, 2023: 5.

[49] Chongwoo Choe, Compulsory or Voluntary Pre-Merger Notification? Theory and Some Evidence, 28(1) International Journal of Industrial Organization 10-20 (Jan. 2010).

[50] For an overview of the impact of unnecessary transaction costs in merger notification in the context of Ireland, see  Paul K. Gorecki, Merger Control in Ireland: Too Many Unnecessary Notifications?, ESRI Working Paper No. 383 (2011), https://www.econstor.eu/handle/10419/50090.

[51] Consultation, 24.

[52] ACCC, 2023, 9.

[53] Consultation, 29.

[54] Consultation, 19; ACCC, 2023: 6-7.

[55] Nicolas Petit, Big Tech and the Digital Economy: The Moligopoly Scenario (2020); see also Walid Chaiehoudj, On “Big Tech and the Digital Economy”: Interview with Professor Nicolas Petit, Competition Forum (11 Jan. 2021), https://competition-forum.com/on-big-tech-and-the-digital-economy-interview-with-professor-nicolas-petit.

[56] Standard for Merger Review, Organisation for Economic Co-operation and Development (11 May 2010), 6, available at https://www.oecd.org/daf/competition/45247537.pdf.

[57] Id.; see also Consultation, 31, indicating that “[SLC test] would enable mergers to be assessed on competition criteria but not prescriptively identify which competition criteria should be taken into account. It may permit more flexible application of the law and a greater degree of economic analysis in merger decision-making” (emphasis added).

[58] See, e.g., European Commission, Guidelines on the Assessment of Non-Horizontal Mergers Under the Council Regulation on the Control of Concentrations Between Undertakings (2008/C 265/07), paras. 11-13.

[59] OECD, supra note 56, at 16; see also European Commission, Guidelines on the Assessment of Horizontal Mergers Under the Council Regulation on the Control of Concentrations between Undertakings (2004/C 31/03).

[60] Consultation, 30-31.

[61] Canadian Competition Act, Sections 78 and 79.

[62] Section 44G, however, does mention a “material increase in competition.” (emphasis added).

[63] ACCC, Merger Guidelines (2008), available at https://www.accc.gov.au/system/files/Merger%20guidelines%20-%20Final.PDF ; see also Australia, Senate 1992, Debates, vol. S157, p. 4776, as cited in the Merger Guidelines (2008).

[64] Geoffrey A. Manne & Lazar Radic, The ABA’s Antitrust Law Section Sounds the Alarm on Klobuchar-Grassley, Truth on the Market (12 May 2022), https://truthonthemarket.com/2022/05/12/the-abas-antitrust-law-section-sounds-the-alarm-on-klobuchar-grassley.

[65] Consultation, 39.

[66] Geoffrey A. Manne, Hearing on “Reviving Competition, Part 5: Addressing the Effects of Economic Concentration on America’s Food Supply,” U.S. House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law (19 Jan. 2021), available at https://laweconcenter.org/wp-content/uploads/2022/01/Manne-Supply-Chain-Testimony-2021-01-19.pdf.

[67] Out-of-Market Efficiencies in Competition Enforcement – Note by Australia, Organisation for Economic Co-operation and Development (6 Dec. 2023), available at https://one.oecd.org/document/DAF/COMP/WD(2023)102/en/pdf.

[68] Re Queensland Co-Op Milling Association Limited and Defiance Holdings Limited (QCMA) (1976) ATPR 40-012.

[69] Elyse Dorsey, et al., Consumer Welfare & The Rule of Law: The Case Against the New Populist Antitrust Movement, 47 Pepperdine Law Review 861 (1 Jun. 2020).

As part of a set of “shock therapy” measures introduced to deregulate and stabilize its economy, the Argentinian government led by newly elected President Javier Milei has already adopted an emergency decree (Decreto de Necesidad y Urgencia) that makes broad array of legal changes. Toward the same goal, the government in late December sent up an omnibus bill on Bases and Starting Points for the Freedom of Argentines Act that, among its 600 changes, proposes to modify the current Act for the Defense of Competition (Act No. 27.442).^[1]

Read the full piece here.