INTEREST OF AMICUS CURIAE[1]

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies, as well as the results of economic research, to inform public policy debates, and it has longstanding expertise in antitrust law. It has filed amicus briefs in this Court and others around the country. See, e.g., Apple Inc. v. Epic Games, Inc., No. 23-344 (U.S.); United States v. Am. Airlines Grp. Inc., No. 23-1802 (1st Cir.); Giordano v. Saks Inc., No. 23-600 (2d Cir.).

ICLE respectfully submits that the decision below undermines the economic foundations of antitrust law by presuming that a potentially procompetitive restraint is per se unlawful, rather than analyzing the restraint under the default rule of reason. The Court should grant the petition for a writ of certiorari to clarify that the type of restraint at issue here is presumptively procompetitive and thus subject to the rule of reason.

ICLE scholars have written extensively on issues closely related to this case, and respectfully submit that their expertise will help clarify the economic problems with the decision below and highlight the reasons for the Court to grant certiorari.

SUMMARY OF ARGUMENT

This Court has clearly and repeatedly recognized that “[t]he rule of reason is the accepted standard for testing whether a practice restrains trade in violation of [Sherman Act] § 1” and that per se prohibitions are “con- fined to restraints … ‘that would always or almost al- ways tend to restrict competition and decrease output.’” Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 885–86 (2007) (quoting Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 723 (1988)). The decision below cannot be reconciled with those important principles.

The Seventh Circuit committed at least three errors that threaten the economic foundations of antitrust law and are worthy of this Court’s attention.

First, the Seventh Circuit inverted the strong presumption in favor of rule of reason analysis—a presumption that is critical in preventing antitrust law from deterring productive and beneficial conduct. Plaintiffs can overcome that presumption, but only when they show that the challenged restraint falls squarely within a class or category that “always or almost always” harms competition. Leegin, 551 U.S. at 885–86. For a court to make that prediction with confidence, it must have sufficient experience with the restraint. Here, the Seventh Circuit turned settled law on its head. From a dearth of experience, the court of appeals reasoned that a per se claim was plausible and sustainable. This approach threatens to chill Interbrand competition.

Second, the Seventh Circuit sustained a per se challenge to a restraint that has significant procompetitive virtues. The challenged contractual provision was designed, and chiefly functioned, as a vertical restraint. The economic literature shows that intrabrand vertical restraints tend to benefit competition. While there are circumstances under which certain vertical restraints can be anticompetitive, there is no literature demonstrating that they are typically anticompetitive. In the franchise context, intrabrand vertical restraints strengthen the franchise’s brand overall and thus foster competition. The existence of some horizontal aspects or applications of such a restraint, moreover, does not negate these procompetitive virtues. The rule of reason fosters consideration of such issues, whereas the Seventh Circuit’s decision curtails it.

Third, the Seventh Circuit held that positive effects on consumers cannot justify a restraint in the labor market. This holding is in deep tension with this Court’s admonition that antitrust analysis focus on “the commercial realities” of a business or industry rather than on “formalistic distinctions.” See Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285 (2018) (“AmEx”) (quoting Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 466–67 (1992)). Second, the decision below is at odds with this Court’s teaching that “reasonableness” is a holistic endeavor, which incorporates consideration of consumer welfare. See NCAA v. Alston, 141 S. Ct. 2141, 2151 (2021). As petitioners explain, a growing circuit split on this fundamental, analytical issue warrants this Court’s immediate attention.

[1] Pursuant to S. Ct. Rule 37.2(a), counsel for all parties have been notified about the filing of this brief. No counsel for a party authored this brief in whole or in part and no person or entity other than amicus, its members, or counsel made a monetary contribution to its preparation or submission.

Introduction

The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center—based in Portland. Oregon, United States—founded to build the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies, and economic findings, to inform public policy. More specifically, ICLE and its affiliate scholars have written extensively about competition and merger policy and routinely engage with policymakers and academics across the globe on these issues.

On November 14, 2023, the Korea Fair Trade Commission (“KFTC”) announced a proposed amendment to its Merger Review Guidelines (“Guidelines”) (“Proposed Amendment”).[1] The Proposed Amendment introduces guidance around how the KFTC assesses mergers in the digital sector and is based on KFTC’s experience in digital merger assessment. We appreciate the opportunity to comment on some of the changes made by the Proposed Amendment.

In our view, the Proposed Amendment departs from established antitrust analytical framework and presume anti-competitive effect for mergers involving online platform businesses.

The amendments raise several important issues, but our comments focus on the eligibility criteria for fast-track review of mergers. Under the existing Merger Review Guidelines, conglomerate mergers involving non-complementary and non-substitutable products are eligible for a fast-track review. However, the Proposed Amendment precludes the applicability of such fast-track review process to transactions that involve online platforms acquiring targets that, in the immediately preceding year, either (i) reached a monthly average of 5 million users (about 10% of Korea’s population) with its products or services, or (ii) invested at least KRW 30 billion in R&D, indicating a high potential for innovation, as long as the merger meets the standard reporting requirements (where one party’s size is KRW 300 billion or more and other party’s size is KRW 30 billion or more).

These changes appear designed to catch certain startup acquisitions that would otherwise escape merger review because the target firm has little to no turnover or assets. In other words, the amendment adds a new threshold that aims to ensure potential “killer acquisitions” are reviewed by enforcers.

But while attempting to catch transactions that may harm consumers is commendable, it is important to understand the important tradeoffs that ensue. Policing mergers is not costless, and any change in merger policy should consider both the benefits and the costs. Agencies will need to devote time and resources to assess mergers that previously were waved through without review. In turn, absent significantly more resources, this will reduce the review time devoted to the most problematic deals. Looking outside the agency, it will also increase the cost of mergers for parties, thereby chilling all deals, even procompetitive deals.

Our comment analyzes these tradeoffs in more detail, ultimately concluding that lower merger-filing thresholds and fewer safe harbors may be inappropriate when viewed through the lens of the error-cost framework. Section I puts the Amendment in a global context, explaining the impetus for and weakness of attempts to bolster merger enforcement around the world. Section II outlines some of the implications of the error-cost framework for merger policy. Section III concludes by putting forward four questions that policymakers should ask themselves when they amend merger-enforcement law and policy.

I.        The Global Crackdown on Mergers

The antitrust policy world has fallen out of love with corporate mergers. After decades of relatively laissez-faire enforcement, spurred in part by the emergence of Chicago school of economics,^[2] a growing number of policymakers and scholars are calling for tougher rules to curb corporate acquisitions. But these appeals are premature. There is currently little evidence to suggest that mergers systematically harm consumer welfare. More importantly, scholars fail to identify alternative institutional arrangements that could capture the anticompetitive mergers that evade prosecution without disproportionate false positives and administrative costs. Their proposals thus fail to meet the requirements of the error-cost framework.

Taking a step back, there are multiple reasons for the antitrust community’s about-face. These include concerns about rising market concentration,^[3] labor-market monopsony power,^[4] and of large corporations undermining the very fabric of democracy.^[5] But of these numerous (mis)apprehensions, one has received the lion’s share of scholarly and political attention: a growing number of voices argue that existing merger rules fail to apprehend competitively significant mergers that either fall below existing merger-filing thresholds or affect innovation in ways that are, allegedly, ignored by current rules. For instance, Rohit Chopra, a former commissioner at the US Federal Trade Commission, asserted that too many transactions avoid antitrust scrutiny by falling through the cracks of HSR premerger notification thresholds. For instance, Rohit Chopra, a former commissioner at the U.S. Federal Trade Commission, asserted that too many transactions avoid antitrust scrutiny by falling through the cracks of the Hart-Scott-Rodino Act’s premerger-notification thresholds. As a result, Chopra claimed, “[t]he FTC ends up missing a large number of anticompetitive mergers every year.”^[6]

These fears are particularly acute in the pharmaceutical and tech industries, where several high-profile academic articles and reports claim to have identified important gaps in current merger-enforcement rules, particularly with respect to acquisitions involving nascent and potential competitors.^[7] Some of these gaps are purported to arise in situations that would normally appear to be procompetitive:

Established incumbents in spaces like tech, digital payments, internet, pharma and more have embarked on bids to acquire features, businesses and functionalities to shortcut the time and effort they would otherwise require for organic expansion. We have traditionally looked at these cases benignly, but it is now right to be much more cautious.^[8]

As a result of these perceived deficiencies, scholars and enforcers have called for tougher rules, including the introduction of lower merger-filing thresholds—similar to what has been put forward in Korea’s proposed reform of its merger rules—and substantive changes, such as the inversion of the burden of proof when authorities review mergers and acquisitions in the digital-platform industry.^[9] Meanwhile, and seemingly in response to the increased political and advocacy pressures around the issue, U.S. antitrust enforcers have recently undertaken several enforcement actions directly targeting such acquisitions.^[10] Meanwhile, and seemingly in response to the increased political and advocacy pressures around the issue, U.S. antitrust enforcers have recently undertaken several enforcement actions that directly target such acquisitions.^[11]

These proposals, however, tend to overlook the important tradeoffs that would ensue from attempts to decrease the number of false positives under existing merger rules and thresholds. While merger enforcement ought to be mindful of these possible theories of harm, the theories and evidence are not nearly as robust as many proponents suggest. Most importantly, there is insufficient basis to conclude that the costs of permitting the behavior they identify is greater than the costs would be of increasing enforcement to prohibit it.^[12]

In this regard, two key strands of economic literature are routinely overlooked (or summarily dismissed) by critics of the status quo.

For a start, as Judge Frank Easterbrook argued in his pioneering work on The Limits of Antitrust, antitrust enforcement is anything but costless.^[13] In the case of merger enforcement, not only is it expensive for agencies to detect anticompetitive deals but, more importantly, overbearing rules may deter beneficial merger activity that creates value for consumers. Indeed, not only are most mergers welfare-enhancing, but barriers to merger activity have been shown to significantly, and negatively, affect early company investment.^[14]

Second, critics are mistaking the nature of causality. Scholars routinely surmise that incumbents use mergers to shield themselves from competition. Acquisitions are thus seen as a means to eliminate competition. But this overlooks an important alternative. It is at least plausible that incumbents’ superior managerial or other capabilities (i.e., what made them successful in the first place) make them the ideal purchasers for entrepreneurs and startup investors who are looking to sell.

This dynamic is likely to be amplified where the acquirer and acquiree operate in overlapping lines of business. In other words, competitive advantage, and the ability to profitably acquire other firms, might be caused by business acumen rather than exemplifying anticompetitive behavior. And significant and high-profile M&A activity involving would-be competitors may thus be the procompetitive byproduct of a well-managed business, rather than anticompetitive efforts to stifle competition.

Critics systematically overlook this possibility. Indeed, Henry Manne’s seminal work on Mergers and Market for Corporate Control^[15]—the first to argue that mergers are a means of applying superior management practices to new assets—is almost never cited by contemporary researchers in this space. Our comments attempt to set the record straight.

With this in mind, we believe that calls to reform merger enforcement rules and procedures should be analyzed under the error-cost framework. With this in mind, we believe that calls to reform merger-enforcement rules and procedures should be analyzed under the error-cost framework. Accordingly, the challenge for policymakers is not merely to minimize type II errors (i.e., false acquittals), which have been a key area of focus for recent scholarship, but also type I errors (i.e., false convictions) and enforcement costs. This is particularly important in the field of merger enforcement, where authorities need to analyze vast numbers of transactions in extremely short periods of time.

In other words, while scholars have raised valid concerns, they have not suggested alternative institutional arrangements to address them that would lead to better overall outcomes. In other words, while scholars have raised valid concerns, they have not suggested alternative institutional arrangements to address those concerns that would lead to better overall outcomes. All legal enforcement systems are imperfect, and it is not enough to justify changes to the system that some imperfections can be identified.^[16] Indeed, it could be that antitrust doctrine currently condones practices that harm innovation, but that there is no cost-effective way to reliably identify and deter this harmful conduct.

For instance, as we discuss below, a recent paper estimates that between 5.3% and 7.4% of pharmaceutical mergers are “killer acquisitions.”^[17] But even if that is accurate, it suggests no tractable basis on which those acquisitions can be differentiated ex ante from the 92.6% to 94.7% that are presumed to be competitively neutral or procompetitive. A reformed system that overly deters these acquisitions in order to capture more of the problematic ones—which is presumably the purpose of the merger-related amendments in the 2023 Competition Act— is not necessarily an improvement.

Further, while many of the arguments suggesting that the current system is imperfect are well-taken, these claims of systemic problems are not always as robust as proponents suggest. This further weakens the case for policy reform, because any potential gains from such reforms are likely far less certain than they are often claimed to be.

II.      Antitrust and the Error-Cost Framework

Firms spend trillions of dollars globally every year on corporate mergers, acquisitions, and R&D investments.^[18] Most of the time, these investments are benign, often leading to cost reductions, synergies, new or improved products, and lower prices for consumers.^[19] For smaller firms, the possibility of being acquired can be vital to making a product worth developing.

There are also instances, however, when M&A activity enables firms to increase their market power and reduce output. Therein lies the fundamental challenge for antitrust authorities: among these myriad transactions, investments, and business decisions, is it possible to effectively sort the wheat from the chaff in a way that leads to net improvements in efficiency and competition, and ultimately consumer welfare? In more concrete terms, the question is: are there reasonable rules and standards that enforcers can use to filter out anticompetitive practices while allowing beneficial ones to follow their course? And if so, can this be done in a timely and cost-effective manner?^[20]

A.      The Use of Filters in Antitrust

What might appear to be a herculean task has, in fact, been considerably streamlined, and vastly improved, by the emergence of the error-cost framework, itself a byproduct of pioneering advances in microeconomics and industrial organization.^[21] This is “the economists’ way out.”^[22] The error-cost framework is designed to enable authorities to focus their limited resources on that conduct most likely to have anticompetitive effects. In practice, this is done by applying several successive filters that separate potentially anticompetitive practices from ones that are likely innocuous.^[23] Depending on this initial classification, practices are then submitted to varying levels of scrutiny, which may range from per se prohibitions to presumptive legality.^[24]

Of the thousands of M&A transactions each year, only a few must be notified to antitrust authorities, and fewer still are subject to in-depth reviews.^[25] For instance, in both the United States and the European Union, only deals that meet certain transaction values and/or revenue thresholds require merger notifications.^[26] Accordingly, U.S. antitrust authorities receive somewhere in the vicinity of 2,000 merger filings per year, while the European Commission usually receives a few hundred.^[27] Typically, less than 5% of these mergers are ultimately subjected to in-depth reviews.^[28] These cases are selected by applying yet another set of filters that include: looking at the relationship between the merging firms (horizontal, vertical, conglomerate); calculating market shares and concentration ratios; and checking whether transactions fall within several recognized theories of harm.^[29]

Similar filtering mechanisms apply to other forms of conduct. Incumbent firms routinely decide to enter adjacent markets, for instance, or to adopt strategies that might incidentally reduce competition in markets where they are already present. As with mergers, authorities and courts apply a series of filters/presumptions to home in on those practices most likely to cause anticompetitive harm.^[30] Firms with low market shares are deemed less likely to possess market power (and thus, less likely to harm competition); vertical agreements are widely seen as being less problematic than horizontal ones; and vertical integration is widely regarded as procompetitive, absent other accompanying factors.^[31]

This system is certainly not perfect; filtering cases in this manner inevitably lets some anticompetitive practices fall through the cracks. Indeed, the error-cost framework is premised on the recognition of this eventuality. Nevertheless, the strengths of this paradigm arguably outweigh its weaknesses. “If presumptions let some socially undesirable practices escape, the cost is bearable. . . . One cannot have the savings of decision by rule without accepting the costs of mistakes.”^[32]

In most jurisdictions around the world, today’s competition merger-control apparatus is administrable,^[33] somewhat predictable,^[34] and—in the case of merger enforcement—it ensures that deals are reviewed in a relatively timely manner.^[35]

The contours of this system have profound ramifications for substantive antitrust policy. Potential reforms need to account for the tradeoffs inherent to this vision of antitrust enforcement: between false positives and false negatives, between timeliness and thoroughness, and so on. Accordingly, the relevant policy question is not whether existing provisions allow certain categories of potentially harmful conduct to go unchallenged. Instead, policymakers should ask whether there is a better set of filters and heuristics that would enable authorities and courts to prevent previously unchallenged anticompetitive conduct without overburdening the system or disproportionately increasing false positives. In short, antitrust enforcers must avoid the so-called “nirvana fallacy” of believing that all errors can be eliminated, and existing policies should thus always be weighed against alternative institutional arrangements (as opposed to merely identifying instances where they lead to false negatives).^[36]

B.      Calls for a Reform of Merger-Enforcement Rules and Thresholds

Against this backdrop, a growing body of economic literature has identified potential inadequacies in both the U.S. and EU merger-control regimes, as well as the antitrust rules that govern the business practices of digital platforms (notably, vertical integration and tying).^[37] These critiques focus on ways in which incumbents might prevent nascent or potential rivals from introducing innovative new products and services that could disrupt their existing businesses. In short, this recent economic literature purports to show how incumbents might use their dominant market positions to reduce innovation.

For instance, recent empirical research purports to show that mergers of pharmaceutical companies with overlapping R&D pipelines result in higher project-termination rates, thus reducing innovation and, ultimately, price competition. These are referred to as “killer acquisitions.”^[38] Others have argued that killer acquisitions also occur in the tech sector, although the empirical evidence offered to support this second claim is much weaker. In large part, this is because it does not differentiate between legitimate, efficient discontinuations of acquired products (such as the product being unsuccessful on the market, or the acquisition being done to hire the staff of the acquired firm) and the elimination of potential competitors.^[39] Acquisitions of nascent and potential competitors undertaken with the intention of reducing competition have also been described as “killer acquisitions,” even if they do not involve their products being discontinued.^[40]

Along similar lines, it is sometimes argued that large tech firms create so-called “kill zones” around their core businesses.^[41] Similarly, some scholars assert that incumbent digital platforms might seek to foreclose rivals in adjacent markets by “copying” their products, or by using proprietary datasets that tilt the scales in their favor.^[42]

All of these practices are said to harm innovation by deterring the incentives of competitors to invest in innovations that compete with incumbents. And the overarching theme of the above research is that existing antitrust doctrine is ill-equipped to handle these practices—or, at the very least, that antitrust law should be enforced more vigorously in these settings.

But while the above research identifies important and potentially harmful conduct that cannot be dismissed out of hand, it is important to recognize its inherent limitations when it comes to informing normative policy decisions. Indeed, there is a vast difference between identifying categories of conduct that sometimes harm consumers, on the one hand, and being able to isolate individual instances of anticompetitive behavior, on the other (and even then, it is important to distinguish conduct that harms consumers overall from conduct that merely harms certain parameters of competition while improving others. In other words, antitrust law should prohibit conduct when the category it belongs to is generally harmful to consumers and/or when harmful occurrences of that conduct can readily be distinguished^[43]).

The above is merely a restatement of the error-cost framework, which highlights that the existence of false negatives is not a sufficient condition for increased intervention. The fact—if it can be proved—that there were some false negatives does not imply that there has been underenforcement with respect to the optimal level of enforcement. In other words, in the digital space, the argument can be made that an optimal merger policy on average leads to ex-post “underenforcement.” Moreover, even if the level of enforcement has been lower than optimal, one must be careful not to swing too far in the opposite direction, especially in high-tech industries. The chilling effect on innovation could be significant.^[44] Instead, any change to the standards of government intervention that seeks to prevent more of these false negatives, with all the accompany tradeoffs and risks inherent to this enterprise, must ultimately increases social welfare overall.

Take the example of Google. It has acquired at least 270 companies over the last two decades.^[45] It has been argued that some of these—such as Google’s acquisitions of YouTube, Waze, or DoubleClick—may have been anticompetitive. The real test for regulators, however, is whether they could reliably identify which of Google’s 270 acquisitions are actually anticompetitive and do so under a decision rule that causes less harm to consumers from false positives caused by the current (alleged) false negatives. If the anticompetitive mergers are such a tiny percentage of total mergers, and if identifying them a priori is difficult, then a precautionary-principle strategy that results in many false positives would likely not merit the benefits from blocking one or two anticompetitive mergers.

Indeed, but for Google and Facebook’s investments in YouTube and Instagram (to cite but two examples), it is far from clear that a mere “video-hosting service” or “photo-sharing app” would have grown into the robust competitor that advocates assume. Apart from the potential synergies arising from the combination of these products with the acquiring companies’ other products (for example, YouTube’s search and recommendation engines being developed by Google, the world’s leading internet-search company, or Instagram’s ad platform being integrated with Facebook’s), corporate control by the acquiring company may lead to these firms being better managed. This concept of M&A as creating a “market for corporate control” adds an important new dimension to the understanding of the tradeoffs involved.^[46]

These anticompetitive theories of harm can thus be separated into three broad categories: (1) large incumbents have become so dominant in their primary markets that venture capitalists decline to fund startups that compete head-on, reducing potential competition; (2) these incumbents acquire potential competitors or non-competitor startups so as to reduce the competition along several dimensions, and (3) that incumbents purchase competitors to shut down their overlapping innovation pipelines (i.e., killer acquisitions).

III.    Concluding Remarks

With this in mind, applying the error-cost framework should lead policymakers to carefully consider the following questions when evaluating the merits and policy implications of economic research in this space:

1. Do the papers advancing these theories identify categories of conduct that, on average, harm consumer welfare?
2. If not, do the papers identify additional factors that would enable authorities to infer the existence of anticompetitive effects in individual cases?
3. If so, would it be feasible for authorities to add these factors to their analysis (in terms of time and resources)?
4. Finally, would prohibiting these practices at an individual or category level prevent efficiencies that would otherwise outweigh these anticompetitive harms? And could these efficiencies be analyzed on a case-by-case basis?

In addition to these error-cost-related questions, it is also necessary to question whether the results of these studies are relevant outside of the specific markets that they examine, and whether they give sufficient weight to countervailing procompetitive justifications.

All of this has profound ramifications for amendments to Korea’s competition law. Lowering merger-filing thresholds may be counterproductive if it means fewer enforcement resources are devoted to other, more important cases. To make matters worse, heightened merger-control rules may deter firms from merging in the first place. In short, we recommend that Korean policymakers carefully consider whether the possibility of catching an additional handful of anticompetitive mergers is worth the significant costs that would be incurred by the Korean economy.

[1] Korea Fair Trade Commission, Administrative notice of amendments to business combination review standards (Nov. 14, 2023), available at https://www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=10291.

[2] See, e.g., Jonathan B Baker, Recent Developments in Economics That Challenge Chicago School Views, 58 Antitrust L.J. 655 (1989) (“Over the past fifteen years, the courts and enforcement agencies have created Robert Bork’s antitrust paradise. Antitrust has adopted the Chicago School’s efficiency analysis and the Chicago School’s conclusions about the effects of business practices.”). Note that, in many ways, the Chicago and late-Harvard views are somewhat similar when it comes to mergers—both schools of thought might thus have influenced this loosening of merger policy. See, e.g., Richard A Posner, The Chicago School of Antitrust Analysis, U. Penn. L. Rev. 937 (1979) (“The change in thinking that has been brought about by the Chicago school is nowhere more evident than in the area of vertical integration. Kaysen and Turner, writing in 1959, advocated for- bidding any vertical merger in which the acquiring firm had twenty percent or more of its market. Areeda and Turner, writing in 1978, express very little concern with anticompetitive effects from vertical integration. In fact, as between a rule of per se illegality for vertical integration by monopolists and a rule of per se legality, their preference is for the latter.”).

[3] See, e.g., Germán Gutiérrez & Thomas Philippon, Declining Competition and Investment in the U.S., NBER Working Paper 1 (2017) (“The U.S. business sector has under-invested relative to Tobin’s Q since the early 2000’s. We argue that declining competition is partly responsible for this phenomenon.”). Contra, Esteban Rossi-Hansberg, Pierre-Daniel Sarte & Nicholas Trachter, Diverging trends in national and local concentration, 35 NBER Macroeconomics Annual 1 (2021) (“Using US NETS data, we present evidence that the positive trend observed in national product-market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment.”).

[4] See, e.g., José Azar, Ioana Marinescu, Marshall Steinbaum & Bledi Taska, Concentration in U.S. labor markets: Evidence From Online Vacancy Data, 66 Labour Economics 101886 (2020) (“These indicators suggest that employer concentration is a meaningful measure of employer power in labor markets, that there is a high degree of employer power in labor markets, and also that it varies widely across occupations and geography.”).

[5] See, e.g., Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age 9 (2018) (“We have managed to recreate both the economics and politics of a century ago—the first Gilded Age—and remain in grave danger of repeating more of the signature errors of the twentieth century. As that era has taught us, extreme economic concentration yields gross inequality and material suffering, feeding an appetite for nationalistic and extremist leadership. Yet, as if blind to the greatest lessons of the last century, we are going down the same path. If we learned one thing from the Gilded Age, it should have been this: The road to fascism and dictatorship is paved with failures of economic policy to serve the needs of the general public.”).

[6] Rohit Chopra, Statement of Commissioner Rohit Chopra, 85 Fed. Regis. 231, 77052 (2020) (“Adequate premerger reporting is a helpful tool used to halt anticompetitive transactions before too much damage is done. However, the usefulness of the HSR Act only goes so far. This is because many deals can quietly close without any notification and reporting, since only transactions above a certain size are reportable.”).

[7] See Collen Cunningham, Florian Ederer, & Song Ma, Killer Acquisitions, 129 J. Pol. Econ. 649 (2021); Sai Krishna Kamepalli, Raghuram Rajan & Luigi Zingales, Kill Zone, Nat’l Bureau of Econ. Research, Working Paper No. 27146 (2020); Digital Competition Expert Panel, Unlocking Digital Competition (2019), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf; Stigler Center for the Study of the Economy and the State, Stigler Committee on Digital Platforms (2019), available at https://www.publicknowledge.org/wp-content/uploads/2019/09/Stigler-Committee-on-Digital-Platforms-Final-Report.pdf; Australian Competition & Consumer Commission, Digital Platforms Inquiry (2019), available at https://www.accc.gov.au/system/files/Digital%20platforms%20inquiry%20-%20final%20report.pdf. See also Jacques Cre?mer, Yves-Alexandre De Montjoye, Heike Schweitzer, Competition Policy For The Digital Era Final Report (2019), available at https://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf [hereinafter “Crémer Report”].

[8] Cristina Caffarra, Gregory S. Crawford, & Tommaso Valletti, “How Tech Rolls”: Potential Competition and “Reverse” Killer Acquisitions, 2 Antitrust Chron. 1, 1 (2020).

[9] As far as jurisdictional thresholds are concerned, see, e.g., Crémer Report, supra note 7, at 10 (“Many of these acquisitions may escape the Commission’s jurisdiction because they take place when the start-ups do not yet generate sufficient turnover to meet the thresholds set out in the EUMR. This is because many digital startups attempt first to build a successful product and attract a large user base while sacrificing short-term profits; therefore, the competitive potential of such start-ups may not be reflected in their turnover. To fill this gap, some Member States have introduced alternative thresholds based on the value of the transaction, but their practical effects still have to be verified.”). As far as inverting the burden of proof is concerned, see, e.g., Crémer Report, supra note 7, at 11 (“The test proposed here would imply a heightened degree of control of acquisitions of small start-ups by dominant platforms and/or ecosystems, to be analysed as a possible strategy against partial user defection from the ecosystem. Where an acquisition is plausibly part of such a strategy, the notifying parties should bear the burden of showing that the adverse effects on competition are offset by merger-specific efficiencies.”).

[10] See FTC Press Release, FTC Sues to Block Procter & Gamble’s Acquisition of Billie, Inc. (Dec. 8, 2020), https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-block-procter-gambles-acquisitionbillie-inc; DOJ Press Release, Justice Department Sues to Block Visa’s Proposed Acquisition of Plaid (Nov. 5, 2020), https://www.justice.gov/opa/pr/justice-department-sues-block-visas-proposedacquisition-plaid; FTC Press Release, FTC Files Suit to Block Edgewell Personal Care Company’s Acquisition of Harry’s, Inc. (Feb. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/02/ftcfiles-suit-block-edgewell-personal-care-companys-acquisition; FTC Press Release, FTC Challenges Illumina’s Proposed Acquisition of PacBio (Dec. 17, 2019), https://www.ftc.gov/newsevents/pressreleases/2019/12/ftc-challenges-illuminas-proposed-acquisition-pacbio; DOJ Press Release, Justice Department Sues to Block Sabre’s Acquisition of Farelogix (Aug. 20, 2019), https://www.justice.gov/opa/pr/justice-department-sues-block-sabres-acquisition-farelogix.

[11] See FTC Press Release, FTC Sues to Block Procter & Gamble’s Acquisition of Billie, Inc. (Dec. 8, 2020), https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-block-procter-gambles-acquisitionbillie-inc; DOJ Press Release, Justice Department Sues to Block Visa’s Proposed Acquisition of Plaid (Nov. 5, 2020), https://www.justice.gov/opa/pr/justice-department-sues-block-visas-proposedacquisition-plaid; FTC Press Release, FTC Files Suit to Block Edgewell Personal Care Company’s Acquisition of Harry’s, Inc. (Feb. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/02/ftcfiles-suit-block-edgewell-personal-care-companys-acquisition; FTC Press Release, FTC Challenges Illumina’s Proposed Acquisition of PacBio (Dec. 17, 2019), https://www.ftc.gov/newsevents/pressreleases/2019/12/ftc-challenges-illuminas-proposed-acquisition-pacbio; DOJ Press Release, Justice Department Sues to Block Sabre’s Acquisition of Farelogix (Aug. 20, 2019), https://www.justice.gov/opa/pr/justice-department-sues-block-sabres-acquisition-farelogix.

[12] See, e.g., Prepared Remarks of Commissioner Noah Joshua Phillips, “Reasonably Capable? Applying Section 2 to Acquisitions of Nascent Competitors,” Antitrust in the Technology Sector: Policy Perspectives and Insights From the Enforcers Conference (Apr. 29, 2021), available at https://www.ftc.gov/system/files/documents/public_statements/1589524/reasonably_capable_-_acquisitions_of_nascent_competitors_4-29-2021_final_for_posting.pdf (“Some would-be reformers view M&A as fundamentally predatory and wish to “level the playing” field for smaller, less competitive, or more sympathetic businesses by throwing as much sand in the gears as possible. But their Harrison Bergeron vision of competition, handicapping successful businesses, will not so much level the field as tilt the scales dramatically in favor of the government, handing tremendous power to regulators, sapping American competitiveness, and hitting Americans in their pocketbooks.”).

[13] Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1 (1984).

[14] For vertical mergers, the welfare-enhancing effects are well-established. See, e.g., Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. Econ. Lit. 677 (2007) (“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.”). See also, Global Antitrust Institute, Comment Letter on Federal Trade Commission’s Hearings on Competition and Consumer Protection in the 21st Century, Vertical Mergers 8–9, Geo. Mason Law & Econ. Research Paper No. 18-27 (2018), https://ssrn.com/abstract=3245940 (“In sum, these papers from 2009-2018 continue to support the conclusions from Lafontaine & Slade (2007) and Cooper et al. (2005) that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets. The results continue to suggest that the modern antitrust approach to vertical mergers 9 should reflect the empirical reality that vertical relationships are generally procompetitive.”). Along similar lines, empirical research casts doubt on the notion that antitrust merger enforcement (in marginal cases) raises consumer welfare. The effects of horizontal mergers are, empirically, less well-documented. See, e.g., Robert W Crandall & Clifford Winston, Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, 17 J. Econ. Persp. 20 (2003) (“We can only conclude that efforts by antitrust authorities to block particular mergers or affect a merger’s outcome by allowing it only if certain conditions are met under a consent decree have not been found to increase consumer welfare in any systematic way, and in some instances the intervention may even have reduced consumer welfare.”). While there is some evidence that horizontal mergers can reduce consumer welfare, at least in the short run, see, for example, Gregory J. Werden, Andrew S. Joskow, & Richard L. Johnson, The Effects of Mergers on Price and Output: Two Case Studies from the Airline Industry, 12 Mgmt. Decis. Econ. 341 (1991), the long-run effects appear to be strongly positive. See, e.g., Dario Focarelli & Fabio Panetta, Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits, 93 Am. Econ. Rev. 1152, 1152 (2003) (“We 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.”). See also generally Michael C. Jensen, Takeovers: Their Causes and Consequences, 2 J. Econ. Persp. 21 (1988). Some related literature similarly finds that horizontal merger enforcement has harmed consumers. See B. Espen Eckbo & Peggy Wier, Antimerger Policy Under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis, 28 J.L. & Econ. 119, 121 (1985) (“In sum, our results do not support the contention that enforcement of Section 7 has served the public interest. While it is possible that the government’s merger policy has deterred some anticompetitive mergers, the results indicate that it has also protected rival producers from facing increased competition due to efficient mergers.”); B. Espen Eckbo, Mergers and the Value of Antitrust Deterrence, 47 J. Finance 1005, 1027-28 (1992) (rejecting “the market concentration doctrine on samples of both U.S. and Canadian mergers. By implication, the results also reject the effective deterrence hypothesis. The evidence is, however, consistent with the alternative hypothesis that the horizontal mergers in either of the two countries were expected to generate productive efficiencies”). Regarding the effect of mergers on investment, see, e.g., Gordon M. Phillips & Alexei Zhdanov, Venture Capital Investments and Merger and Acquisition Activity Around the World, NBER Working Paper No. w24082 (Nov. 2017), available at https://ssrn.com/abstract=3082265 (“We examine the relation between venture capital (VC) investments and mergers and acquisitions (M&A) activity around the world. We find evidence of a strong positive association between VC investments and lagged M&A activity, consistent with the hypothesis that an active M&A market provides viable exit opportunities for VC companies and therefore incentivizes them to engage in more deals.”). And increased M&A activity in the pharmaceutical sector has not led to decreases in product approvals; rather, quite the opposite has happened. See, e.g., Barak Richman, Will Mitchell, Elena Vidal, & Kevin Schulman, Pharmaceutical M&A Activity: Effects on Prices, Innovation, and Competition, 48 Loyola U. Chi. L.J. 799 (2017) (“Our review of data measuring pharmaceutical innovation, however, tells a different story. First, even as merger activity in the United States increased over the past ten years, there has been a steady upward trend of FDA approvals of new molecular entities (“NMEs”) and new biological products (“BLAs”). Hence, the industry has been highly successful in bringing new products to the market.”).

[15] Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).

[16] See Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J.L. Econ. 1, 22 (1969) (“The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing “imperfect” institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”).

[17] Cunningham et al., supra note 7, at 692 (“Given these assumptions and estimates, what would the fraction ν of pure killer acquisitions among transactions with overlap have to be to result in the lower development of acquisitions with overlap (13.4%)? Specifically, we solve the equation 13.4% = ν × 0 + (1 − ν) × 17.5% for ν which yields ν = 23.4%. Therefore, we estimate that 5.3% (= ν × 22.7%) of all acquisitions, or about 46 (= 5.3% × 856) acquisitions every year, are killer acquisitions. If instead we assume the non-killer acquisitions to have the same development likelihood as non-acquired projects (19.9%), we estimate that 7.4% of acquisitions, or 63 per year, are killer acquisitions.”).

[18] See Value of Mergers and Acquisitions (M&A) Worldwide from 1985 to 2020, Statista (Jan. 15, 2021), https://www.statista.com/statistics/267369/volume-of-mergers-and-acquisitions-worldwide. See Gross Domestic Spending on R&D, OECD (last visited Apr. 29, 2021) https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm.

[19] See supra note 14.

[20] Running the antitrust system is itself a cost to society.

[21] See, e.g., Olivier E. Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 Am. Econ. Rev. 18 (1968). See also, Easterbrook, supra note 13; Henry G. Manne, supra note 15; William M Landes & Richard A Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937 (1980).

[22] Easterbrook, id., at 14.

[23] See Easterbrook, id., at 17 (“The task, then, is to create simple rules that will filter the category of probably beneficial practices out of the legal system, leaving to assessment under the Rule of Reason only those with significant risks of competitive injury.”).

[24] Id. at 15 (“They should adopt some simple presumptions that structure antitrust inquiry. Strong presumptions would guide businesses in planning their affairs by making it possible for counsel to state that some things do not create risks of liability. They would reduce the costs of litigation by designating as dispositive particular topics capable of resolution.”).

[25] See Number of Merger and Acquisition Transactions Worldwide from 1985 to 2021, Statista (May 14, 2021), https://www.statista.com/statistics/267368/number-of-mergers-and-acquisitions-worldwide-since-2005.

[26] See 15 U.S.C. §18a (1976). See also, FTC Premerger Notification Office Staff, HSR Thresholds Adjustments and Reportability for 2020, FTC Competition Matters (Jan. 31, 2020), https://www.ftc.gov/news-events/blogs/competition-matters/2020/01/hsr-threshold-adjustments-reportability-2020. See also Council Regulation 139/2004, 2004 O.J. (L 24) 1, 22 (EC).

[27] See Federal Trade Comm’n & U.S. Dep’t of Justice, Hart-Scott-Rodino Annual Report Fiscal Year 2019 (2020), available at https://www.ftc.gov/system/files/documents/reports/federal-trade-commission-bureau-competition-department-justice-antitrust-division-hart-scott-rodino/p110014hsrannualreportfy2019_0.pdf. See also, European Commission, Merger Statistics, 21 September 1990 to 31 December 2020 (2021), available at https://ec.europa.eu/competition/mergers/statistics.pdf.

[28] See FTC and European Commission, id.

[29] See U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010), U.S. Dep’t of Justice & Fed. Trade Comm’n, Vertical Merger Guidelines (2020). See also Commission Guidelines on the Assessment of Non-Horizontal Mergers Under the Council Regulation on the Control of Concentrations Between Undertakings, 2008 O.J. (C 265) 6, 25.

[30] See Federal Trade Commission & U.S. Department of Justice, Antitrust Guidelines for the Licensing of Intellectual Property 15 (Jan. 12, 2017) (“The existence of a horizontal relationship between a licensor and its licensees does not, in itself, indicate that the arrangement is anticompetitive. Identification of such relationships is merely an aid in determining whether there may be anticompetitive effects arising from a licensing arrangement.”). See also European Commission, Communication from the Commission—Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, O.J. C. 45, 7–20 (Feb. 24, 2009).

[31] See Antitrust Guidelines for the Licensing of Intellectual Property, id. See also, Commission Guidelines on Vertical Restraints, 2010 O.J. (C 130) 1, 46, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52010XC0519(04)&from=EN.

[32] Easterbrook, supra note 13, at 15.

[33] It requires only limited government resources to function, compared to, for example, a system that reviews every merger in detail.

[34] Companies can self-assess whether their mergers are likely to be struck down by authorities and adapt their investment decisions accordingly.

[35] Even in-depth merger investigations are typically concluded within months, rather than years.

[36] See Demsetz, supra note 16, at 1 (“The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing “imperfect” institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”).

[37] See Cunningham et al., supra note 7; Zingales et al., supra note 7; Kevin A Bryan & Erik Hovenkamp, Antitrust Limits on Startup Acquisitions, 56 Rev. Indus. Org. 615 (2020); Mark A. Lemley & Andrew McCreary, Exit Strategy, Stanford Law and Economics Working Paper No. 542 (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3506919.

[38] See Cunningham et al., id. at 650 (“We argue that an incumbent firm may acquire an innovative target and terminate the development of the target’s innovations to preempt future competition. We call such acquisitions ‘killer acquisitions,’ as they eliminate potentially promising, yet likely competing, innovation.”).

[39] See, e.g., Axel Gautier & Joe Lamesch, Mergers in the Digital Economy, Info. Econ. & Pol’y (2000) (“There are three reasons to discontinue a product post-acquisition: the product is not as successful as expected, the acquisition was not motivated by the product itself but by the target’s assets or R&D effort, or by the elimination of a potential competitive threat. While our data does not enable us to screen between these explanations, the present analysis shows that most of the startups are killed in their infancy.”).

[40] John M. Yun, Potential Competition, Nascent Competitors, and Killer Acquisitions, in GAI Report on the Digital Economy (Ginsburg & Wright, eds. 2000).

[41] See Zingales et al. supra note 7.

[42] See, e.g., Kevin Caves & Hal Singer, When the Econometrician Shrugged: Identifying and Plugging Gaps in the Consumer-Welfare Standard, 26 Geo. Mason L. Rev. 396 (2018) (“Or imagine the platform was appropriating or “cloning” app functionality into its basic service. The only potential harm in this instance would be that independent edge providers would be encouraged to exit or discouraged from entering in future periods. In theory, edge providers might be discouraged to compete in the app space given what they perceive to be a slanted playing field.”).

[43] See, e.g., Eric Fruits, Justin (Gus) Hurwitz, Geoffrey A. Manne, Julian Morris, & Alec Stapp, Static and Dynamic Effects of Mergers: A Review of the Empirical Evidence in the Wireless Telecommunications Industry, OECD Directorate for Financial and Enterprise Affairs Competition Committee, Global Forum on Competition, DAF/COMP/GF(2019)13 (Dec. 6, 2019) at ¶ 61, available at https://one.oecd.org/document/DAF/COMP/GF(2019)13/en/pdf (“Studies that do not consider these [non-price] effects are incomplete for purposes of evaluating the mergers’ consumer welfare effects, and [are] all-too-easily used by advocates to misleadingly predict negative consumer outcomes. This is not necessarily a criticism of the studies themselves, which generally do not make comprehensive policy conclusions. The reality is that it is exceptionally difficult to comprehensively study even price effects, such that a well-conducted study of price effects alone is a valuable contribution to the literature. Nevertheless, in the context of evaluating prospective transactions, the results of such studies must be discounted to account for their exclusion of non-price effects.”).

[44] Luís Cabral, Merger Policy in Digital Industries, CEPR Discussion Paper No. DP14785 (May 2020) at 12, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3612854.

[45] See Carl Shapiro, Antitrust in the Time of Populism, 61 Int’l J. Indus. Org. 714 (2018).

[46] See Henry G. Manne, supra note 15.

Interest of Amicus[1]

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center that builds intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies and economic learning to inform policy debates and has longstanding expertise evaluating law and policy.

ICLE has an interest in ensuring that First Amendment law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis. ICLE scholars have written extensively on issues related to social media regulation and free speech. See, e.g., Geoffrey A. Manne, Ben Sperry, & Kristian Stout, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, 49 Rutgers Computer & Tech. L. J. 26 (2022); Ben Sperry, Knowledge and Decisions in the Information Age: The Law & Economics of Regulating Misinformation on Social-Media Platforms, 59 Gonzaga L. Rev., forthcoming (2023); Br. of Internet Law Scholars, Gonzalez v. Google; Jamie Whyte, Polluting Words: Is There a Coasean Case to Regulate Offensive Speech?, ICLE White Paper (Sep. 2021); Ben Sperry, An L&E Defense of the First Amendment’s Protection of Private Ordering, Truth on the Market (Apr. 23, 2021); Liability for User-Generated Content Online: Principles for Lawmakers (Jul. 11, 2019).

Statement

The pair of NetChoice cases before the Court presents the opportunity to bolster the Court’s longstanding jurisprudence on state action and editorial discretion by affirming that the First Amendment applies to Internet speech without disfavor. See Reno v. ACLU, 521 U.S. 844, 870 (1997) (finding “no basis for qualifying the level of First Amendment scrutiny that should be applied” to the Internet).

The First Amendment protects social media companies’ rights to exercise their own content moderation policies free from government interference. Social media companies are private actors with the same right to editorial discretion over disseminating third-party speech as offline equivalents like newspapers and cable operators. See Manhattan Cmty. Access Corp. v. Halleck, 139 S. Ct. 1921, 1926 (2019); Mia. Herald Publ’g Co. v. Tornillo, 418 U.S. 241 (1974); Turner Broad. Sys. v. FCC, 512 U.S. 622 (1994).

Consistent with that jurisprudence, the Court should conclude that social media companies are private actors fully capable of taking part in the marketplace of ideas through their exercise of editorial discretion, free from government interference.

Summary of Argument

“The most basic of all decisions is who shall decide.” Thomas Sowell, Knowledge and Decisions 40 (2d ed. 1996). Under the First Amendment, the general rule is that private actors get to decide what speech is acceptable. It is not the government’s place to censor speech or to require private actors to open their property to unwanted speech. The market process determines speech rules on social media platforms[2] just as it does in the offline world.

The animating principle of the First Amendment is to protect this “marketplace of ideas.” “The theory of our Constitution is ‘that the best test of truth is the power of the thought to get itself accepted in the competition of the market.’” United States v. Alvarez, 567 U.S. 709, 728 (2012) (quoting Abrams v. United States, 250 U.S. 616, 630 (1919) (Holmes, J., dissenting)). To facilitate that competition, the Constitution staunchly protects the liberty of private actors to determine what speech is acceptable, largely free from government regulation of this marketplace. See Halleck, 139 S. Ct. at 1926 (“The Free Speech Clause of the First Amendment constrains governmental actors and protects private actors….”).

Importantly, one way private actors participate in the marketplace of ideas is through private ordering—by setting speech policies for their own private property, enforceable by common law remedies under contract and property law. See id. at 1930 (a “private entity may thus exercise editorial discretion over the speech and speakers in the forum”).

Protecting private ordering is particularly important with social media. While the challenged laws concern producers of social media content, producers are only a sliver of social media users. The vast majority of social media users are content consumers, and it is for their benefit that social media companies moderate content. Speech, even when lawful and otherwise protected by the First Amendment, can still be harmful, at least from the point of view of listeners. Social media companies must balance users’ demand for speech with the fact that not everyone wants to consume every possible type of speech.

The issue is how best to optimize the benefits of speech while minimizing negative speech externalities. Speech produced on social media platforms causes negative externalities when some consumers are exposed to speech they find offensive, disconcerting, or otherwise harmful. Those consumers may stop using the platform as a result. On the other hand, if limits on speech production are too extreme, speech producers and consumers may seek other speech platforms.

To optimize the value of their platforms, social media companies must consider how best to keep users—both producers and consumers of speech—engaged. Major social media platforms mainly generate revenue through advertisements. This means a loss in user engagement could reduce the value to advertisers, and thus result in less advertising revenue. In particular, a loss in engagement by high-value users could result in less advertising, and that in turn, diminishes incentives to invest in the platform. Optimizing a platform requires satisfying users who are valuable to advertisers.

Major social media platforms have developed moderation policies in response to market demand to protect their users from speech those users consider harmful. This editorial control is protected First Amendment activity.

On the other hand, the common carriage justifications Texas and Florida offer for their restrictions on social media platforms’ control over their own property do not save the States’ impermissible intervention into the marketplace of ideas. Two of the most prominent legal justifications for common carriage regulation—holding one’s property open to all-comers and market power—do not apply to social media companies. Major social media companies require all users to accept terms of service, which limit what speech is allowed. And assuming market power can justify common carriage, neither Florida nor Texas even attempted to make such a finding, making at best mere assertions.

The States’ intervention is more like treating social media platforms as company towns—an outdated approach that this Court should reject as inconsistent with First Amendment doctrine and utterly unsuitable to the Internet Age.

Argument

I. Social Media Platforms Are Best Positioned to Optimize Their Platforms To Serve Their Users’ Speech Preferences.

The First Amendment promotes a marketplace of ideas. To have a marketplace of any kind, there must be strong private property rights and enforceable contracts that enable entrepreneurs to discover the best ways to serve consumers. See generally Hernando de Soto, The Mystery of Capital (2000). As full participants in the marketplace of ideas, social media platforms must be free to exercise their own editorial policies and have choice over which ideas they allow on their platforms. Otherwise, there is no marketplace of ideas at all, but either a government-mandated free-for-all where voices struggle to be heard or an overly restricted forum where the government censors disfavored ideas.

The marketplace analogy is apt when considering First Amendment principles because, like virtually any other human activity, speech has both benefits and costs. Like other profit-driven market endeavors, it is ultimately the subjective, individual preferences of consumers that determine how to manage those tradeoffs. The nature of what is deemed offensive is obviously context- and listener-dependent, but the parties best suited to set and enforce appropriate speech rules are the property owners subject to the constraints of the marketplace.

When it comes to speech, an individual’s desire for an audience must be balanced with a prospective audience’s willingness to listen. Formal economic institutions acting in the marketplace must strike the proper balance between these desires and have an incentive to get it right or they could lose consumers. Asking government to make categorical decisions for all of society is substituting centralized evaluation of the costs and benefits of access to communications for the individual decisions of many actors, including property owners who open their property to third party speech. As the economist Thomas Sowell put it, “that different costs and benefits must be balanced does not in itself imply who must balance them?or even that there must be a single balance for all, or a unitary viewpoint (one ‘we’) from which the issue is categorically resolved.” Thomas Sowell, Knowledge and Decisions 240 (2d ed. 1996).

Rather than incremental decisions on how and under what terms individuals may relate to one another on a particular platform—which can evolve over time in response to changes in what individuals find acceptable—governments can only hand down categorical guidelines through precedential decisions: “you must allow a, b, and c speech” or “you must not allow x, y, and z speech.”

This freedom to experiment and evolve is vital in the social-media sphere, where norms about speech are in constant flux. Social media users often impose negative externalities on other users through their speech. Thus, social media companies must resolve social-cost problems among their users by balancing their speech interests.

In his famous work “The Problem of Social Cost,” the economist Ronald Coase argued that the traditional approach to regulating externalities was misguided because it overlooked the reciprocal nature of harms. Ronald H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1, 2 (1960). For example, the noise from a factory is a potential cost to the doctor next door who consequently cannot use his office to conduct certain testing, and simultaneously the doctor moving his office next door is a potential cost to the factory’s ability to use its equipment. In a world of well-defined property rights and low transaction costs, the initial allocation of a right would not matter, because the parties could bargain to overcome the harm in a beneficial manner—i.e., the factory could pay the doctor for lost income or to set up sound-proof walls, or the doctor could pay the factory to reduce the sound of its machines. But in the real world, where there are often significant transaction costs, who has the initial right matters because it is unlikely that the right will get to the highest valued use.

Similarly, on social media, speech that some users find offensive or false may be inoffensive or even patently true to other users. Protecting one group from offensive speech necessarily imposes costs on the group that favors the same speech. There is a reciprocal nature to the harms of speech, much as with other forms of nuisance. Due to transaction costs, it is unlikely that users will be able to effectively bargain to a solution on speech harms. There is a significant difference, though. Unlike the situation of the factory owner and the doctor, social media users are all using the property of social media companies. And those companies are best positioned to—and must be allowed to—balance these varied interests in real-time to optimize their platform’s value in response to consumer demand.

Social media companies are what economists call “multi-sided” platforms. See generally David S. Evans & Richard Shmalensee, Matchmakers: The New Economics of Multisided Platforms (2016). They are for-profit businesses, and the way they generate profits is by acting as intermediaries between users and advertisers. If they fail to serve their users well, those users will abandon the platform. Without users, advertisers would have no interest in buying ads. And without advertisers, there is no profit to be made.

As in any other community, “[i]nteractions on multi-sided platforms can involve behavior that some users find offensive.” David S. Evans, Governing Bad Behavior by Users of Multi-Sided Platforms, 27 Berkeley Tech. L.J. 1201, 1215 (2012). As a result, “[p]eople may incur costs [from] unwanted exposure to hate speech, pornography, violent images, and other offensive content.” Id. And “[e]ven if they are not exposed to this content, they may dislike being part of a community in which such behavior takes place.” Id.

These cases challenge laws that cater to one set of social media users—producers of speech on social media platforms. But social media platforms must be at least as sensitive to their speech consumers. Indeed, the one-percent rule—“a vast majority of user-generated content in any specific community comes from the top 1% of active users”^[3]—teaches that speech-consuming users may be even more important because they far outnumber producers. In turn, less intense users are usually the first to leave a platform, and their exit may cascade into total platform collapse. See, e.g., János Török & János Kertész, Cascading Collapse of Online Social Networks, 7 Sci. Rep., art. 16743 (2017).

Social media companies thus need to optimize the value of their platform by setting rules that keep users—mostly speech consumers—sufficiently engaged that there are advertisers who will pay to reach them. Even more, social media platforms must encourage engagement by the right users. To attract advertisers, platforms must ensure individuals likely to engage with advertisements remain active on the platform.^[4] Platforms ensure this optimization by setting and enforcing community rules.

In addition, like users, advertisers themselves have preferences social media platforms must take into account. Advertisers may threaten to pull ads if they do not like the platform’s speech-governance decisions. For instance, after Elon Musk restored the accounts of Twitter users who had been banned by the company’s prior leadership, major advertisers left the platform. See Kate Conger, Tiffany Hsu, & Ryan Mac, Elon Musk’s Twitter Faces Exodus of Advertisers and Executives, N.Y. Times (Nov. 1, 2022); Ryan Mac & Tiffany Hsu, Twitter’s US Ad Sales Plunge 59% as Woes Continue, N.Y. Times (Jun. 5, 2013).

Thus, it is no surprise that in the cases of major social media companies, the platforms have set content-moderation standards that restrict many kinds of speech. See generally Kate Klonick, The New Governors: The People, Rules, and Processes Governing Online Speech, 131 Harv. L. Rev. 1598 (2018).

The bottom line is that the market process leaves the platforms themselves best positioned to make these incremental editorial decisions about their users’ preferences on speech, in response to the feedback loop between consumer, producer, and advertiser demand. It should go without saying that social media users do not necessarily want more opportunities to say and hear certain speech. Forcing social media companies to favor one set of users—a fraction of speech producers—by forbidding “viewpoint discrimination” favored by other users is unwarranted and unlawful interference in those companies’ editorial discretion. That interference threatens rather than promotes the marketplace of ideas.

II. The First Amendment Protects Private Ordering of Speech, Including Social Media Platform Moderation Polices.

The First Amendment protects the right of social media platforms to serve the speech preferences of their users through their moderation policies.

The “text and original meaning [of the First and Fourteenth Amendments], as well as this Court’s longstanding precedents, establish that the Free Speech Clause prohibits only governmental abridgment of speech. The Free Speech Clause does not prohibit private abridgment of speech.” Halleck, 139 S. Ct. at 1928. The First Amendment’s reach does not grow when private property owners open their property for speech. If such property owners were “subject to First Amendment constraints” and thus “lose the ability to exercise what they deem to be appropriate editorial discretion within that open forum” they would “face the unappetizing choice of allowing all comers or closing the platform altogether.” Id. at 1930. That is, the First Amendment respects—indeed protects—private ordering.

So, while the First Amendment protects the right of individuals to speak (and receive speech) without fear of legal repercussions in most instances, it does not make speech consequence-free, nor does it mandate the carrying of all speech in private spaces.

“Bad” speech has, in fact, long been kept in check via informal means, or what one might call “private ordering.” In this sense, property rights and contract law have long played a crucial role in determining the speech rules of any given space.

For instance, a man would be well within his legal rights to eject a guest from his home for using racial epithets. As a property owner, he would not only have the right to ask that person to leave but could exercise his right to eject that person as a trespasser—if necessary, calling the police to assist him. Similarly, one could not expect to go to a restaurant and yell at the top of her lungs about political issues and expect the venue to abide. A bar hosting an “open mic night” and thus opening itself up to speech is still within its rights to end a performance so offensive it could lead to a loss of patrons. Subject to narrow exceptions, property owners determine acceptable speech on their property and may enforce those rules by excluding those who refuse to comply.

A. Social media platforms are not state actors.

One exception to this strong distinction between state and private action is when a “private entity performs a traditional, exclusive public function.” See Halleck, 139 S. Ct. at 1928. In those cases, there may be a right to free speech that operates against a private actor. See Marsh v. Alabama, 326 U.S. 501 (1946).

Proceeding from Marsh, many litigants seize upon this Court’s recent analogizing social media to the “modern public square.” Packingham v. N. Carolina, 137 S. Ct. 1730, 1737 (2017). They argue social media companies are like a company town or town square and so lack the discretion to restrict speech protected by the First Amendment. But cases since Marsh make clear that the state-actor exception is exceptionally narrow.

In Marsh, this Court found that a company town, while private, was a state actor for purposes of the First Amendment. At issue was whether the company town could prevent a Jehovah’s Witness from passing out literature on the town’s sidewalks. The Court noted that “[o]wnership does not always mean absolute dominion. The more an owner, for his advantage, opens up his property for use by the public in general, the more do his rights become circumscribed by the statutory and constitutional rights of those who use it.” Marsh, 326 U.S. at 506. The Court proceeded to balance private property rights with First Amendment rights, determining that, in company towns, the First Amendment’s protections should be in the “preferred position.” See id. at 509.

The Court later extended this finding to shopping centers, finding they were the “functional equivalent” to the business district in Marsh, and thus finding that a shopping center could not restrict peaceful picketing of a grocery story by a local food-workers union. Food Employees v. Logan Valley Plaza, 391 U.S. 308, 318, 325 (1968).

But the Court began retreating from both Logan Valley and Marsh just a few years later in Lloyd Corp. v. Tanner, 407 U.S. 551 (1972), which concerned hand-billing in a shopping mall. Noting the “economic anomaly” that was company towns, the Court said Marsh “simply held that where private interests were substituting for and performing the customary functions of government, First Amendment freedoms could not be denied where exercised in the customary manner on the town’s sidewalks and streets.” Id. at 562 (emphasis added).

Building on Tanner, the Court went a step further in Hudgens v. NLRB, 424 U.S. 507 (1976), reversing Logan Valley and more severely cabining Marsh. Hudgens involved picketing on private property, and the Court concluded bluntly that, “under the present state of the law the constitutional guarantee of free expression has no part to play in a case such as this[.]” Id. at 521. Marsh is now a narrow exception, the Court explained, limited to situations where private property has taken on all attributes of a town. See id. at 516. And following Hudgens, the Court further limited the public-function test to “the exercise by a private entity of powers traditionally exclusively reserved to the State.” See Jackson v. Metropolitan Edison Co., 419 U.S. 345, 352 (1974).

Today it is well-established that “the constitutional guarantee of free speech is a guarantee only against abridgment by government, federal or state.” Hudgens, 424 U.S. at 513. Purely private actors—even those who open their property to the public—are not subject to First-Amendment limits on how they use their property.

The Court reaffirmed that rule recently in Halleck, which considered whether a public-access channel operated by a cable provider was a state actor. Summarizing the case law, the Court said the test required more than just a finding that the government at some point exercised the same function or that the function serves the public good. Instead, the government must have “traditionally and exclusively performed the function.” Halleck, 139 S. Ct. at 1929 (emphasis in original).

The Court then found that merely operating as a public forum for speech is not a function traditionally and exclusively performed by the government. And because “[it] is not an activity that only governmental entities have traditionally performed,” a private actor providing a forum for speech retains “editorial discretion over the speech and speakers in the forum.” Id. at 1930.

Following this Court’s state-actor jurisprudence, federal courts have consistently found social media companies are not equivalent to company towns and thus not subject to First Amendment constraints. Unlike the company town, where those within their geographical confines have little choice but to deal with them as if they are the government themselves, social media users can simply use alternative means to convey speech or receive it. The Ninth Circuit, for instance, squarely rejected the argument that social media companies fulfill a traditional, public function. See Prager Univ. v. Google, LLC, 951 F.3d 991, 996-99 (9th Cir. 2020). Every federal court to consider whether social media companies are state actors under this theory has found the same. See, e.g., Freedom Watch, Inc. v. Google Inc., 816 F. App’x 497, 499 (D.C. Cir. 2020); Brock v. Zuckerberg, 2021 WL 2650070, at *3 (S.D.N.Y. Jun. 25, 2021); Zimmerman v. Facebook, Inc., 2020 WL 5877863 at *2 (N.D. Cal. Oct. 2, 2020); Ebeid v. Facebook, Inc., 2019 WL 2059662 at *6 (N.D. Cal. May 9, 2019); Green v. YouTube, LLC, 2019 WL 1428890, at *4 (D.N.H. Mar. 13, 2019); Nyabwa v. Facebook, 2018 WL 585467, at *1 (S.D. Tex. Jan. 26, 2018); Shulman v. Facebook.com, 2017 WL 5129885, at *4 (D.N.J. Nov. 6, 2017).

B. Social media companies have a right to editorial discretion.

Private actors have the right to editorial discretion that cannot generally be overcome by state action compelling the dissemination of speech. See Mia. Herald Publ’g Co. v. Tornillo, 418 U.S. 241 (1974); Turner Broad. Sys. v. FCC, 512 U.S. 622 (1994). This is particularly important for private actors whose business is disseminating speech, like newspapers, cable operators, and social media companies.

In Tornillo, the Court struck a right-to-reply statute for political candidates because it “compel[s] editors or publishers to publish that which ‘reason tells them should not be published.’” 418 U.S. at 256. The Court established a general rule that the limits on media companies’ editorial discretion were not defined by government edict but by “the acceptance of a sufficient number of readers—and hence advertisers —to assure financial success; and, second, the journalistic integrity of its editors and publishers.” Id. at 255 (citing Columbia Broadcasting System, Inc. v. Democratic Nat’l Comm., 412 U. S. 94, 117 (1973)). In other words, the limits on how private entities exercise their editorial discretion comes from the marketplace of ideas itself—the preferences of speech consumers, advertisers, and the property owners—not the government.

The size and influence of social media companies does not shrink Tornillo’s effect. No matter how large the editor or the forum, the government still may not coerce private entities to disseminate speech. See id. at 254 (“However much validity may be found in these arguments [about monopoly power], at each point the implementation of a remedy such as an enforceable right of access necessarily calls for some mechanism .?.?.?If it is governmental coercion, this at once brings about a confrontation with the express provisions of the First Amendment.”). Alleged market power is insufficient to justify compelling the dissemination of speech by social media companies.

Turner confirms that market power is irrelevant. There the Court began with “an initial premise: Cable programmers and cable operators engage in and transmit speech, and they are entitled to the protection of the speech and press provisions of the First Amendment.” 512 U.S. at 636. While the Court nonetheless applied intermediate scrutiny, it did so based on technological differences in transmission by newspapers and cable television, and the fact that the law was content-neutral. The level of scrutiny thus turns on “the special characteristics” of transmission, not “the economic characteristics” of the market. Id. at 640.

Returning to Tornillo, the Court reasoned that the law violated the First Amendment by intruding upon the company’s editorial discretion. See 418 U.S. at 258. Like newspapers, social media platforms are “more than a passive receptable for news, comment, and advertising,” as their “choice of material,” their “decisions made as to the limitations on the size and content of the paper” and their “treatment of public issues and public officials—whether fair or unfair—constitute the exercise of editorial control and judgment.” Id. Indeed, that exercise of editorial control and judgment is central to a platform’s retention of speech consumers and attraction of advertisers targeting those users, and thus the platform’s continued survival. See supra, pp. ___.

Accordingly, federal courts rightly have called government actions into question when they violate the right of social media platforms to exercise editorial discretion. See NetChoice, LLC v. Bonta, 2023 WL 6135551, at *15 (N.D. Cal. Sept. 18, 2023); O’Handley v. Padilla, 579 F. Supp. 3d 1163, 1186-88 (N.D. Cal. Jan. 10, 2022); see also Murthy v. Missouri, No. 23-411, 2023 WL 6935337, at *2 (U.S. Oct. 20, 2023) (Alito, J., dissenting) (“The injunction applies only when the Government crosses the line and begins to coerce or control others’ [i.e. the social media companies’] exercise of their free-speech [i.e. editorial discretion] rights.”).

Thus, the Fifth Circuit’s claim in Paxton that “the Supreme Court’s cases do not carve out ‘editorial discretion’ as a special category of First-Amendment-protected expression,” 49 F.4th at 463, is demonstrably wrong. The Court has established that private actors have a right to exercise editorial discretion concerning speech on their property. See Halleck (using the phrase “editorial discretion” 11 times). Social media platforms have the same right.

C. Strict scrutiny applies.

As social media companies have a right to editorial discretion, the next question is the level of scrutiny the challenged statutes must satisfy. Strict scrutiny is proper, because social media platforms are much more like the newspapers in Tornillo than the cable companies in Turner.

In Turner, the Court found:

[The] physical connection between the television set and the cable network gives the cable operator bottleneck, or gatekeeper, control over most (if not all) of the television programming that is channeled into the subscriber’s home .?.?.?. [U]nlike speaker in other media, [cable operators] can thus silence the voice of competing speakers with a mere flick of the switch.

512 U.S. at 656. Social media platforms have no physical control of the connection to the home, and thus no practical ability to exclude competing voices or platforms. The internet architecture simply does not allow them to stop users from using other sites to find speech or speak. Strict scrutiny should apply to SB 7072 and HB 20.

Likewise, compelling social media companies to allow speech contrary to their terms of service is fundamentally different than mandating access for military recruiters in law schools or requiring shopping malls to allow the peaceful exercise of speech in areas held open to the public. Contra Paxton, 49 F.4th at 462-63. In those instances, there was no identification of the venue with the message. See Rumsfeld v. Forum for Acad. & Inst. Rights, Inc., 547 U.S. 47, 65 (2006); PruneYard Shopping Ctr. v. Robins, 447 U.S. 74, 86-88 (1980).

Here, the moderation decisions of social media companies do have implications for advertisers who do not want their brand associated with certain content. See Jonathan Vanian, Apple, Disney, other media companies pause advertising on X after Elon Musk boosted antisemitic tweet, CNBC (Nov. 17, 2023);[5] Caleb Ecarma, Twitter Can’t Seem to Buck Its Advertisers-Don’t-Want-to-Be-Seen-Next-to-Nazis Problem, Vanity Fair (Aug. 17, 2023);[6] Ryan Mac & Tiffany Hsu, Twitter’s US Ad Sales Plunge 59% as Woes Continue, N.Y. Times (Jun. 5, 2023).[7] Similarly, users will exit if they don’t enjoy the experience of the platform. See Steven Vaughan-Nichols, Twitter seeing ‘record user engagement’? The data tells a different story, ZDNet (Jun. 30, 2023).[8] Speech by social media companies disavowing what is said by some users of their platforms does not prevent advertisers and much of the public from identifying user speech with the platform.

Moreover, both the Florida and Texas laws are discriminate based upon content, as a reviewing court would have to consider what speech is at issue to determine whether a social media company can moderate it. This makes the laws different than those at issue in Turner, and offer an alternative reason they should be subject to strict scrutiny.

Section 230 of the Communications Act does not change this analysis. Contra Paxton, 49 F.4th at 465-66. Section 230 supplements the First Amendment’s protection of editorial discretion by granting “providers and users of an interactive computer service” immunity from (most) lawsuits for speech generated by other “information content providers” on their platforms. See 47 U.S.C. §230(c). The animating reason for Section 230 was to provide “protection for private blocking and screening” by preventing lawsuits over third party content that was left up, see Section 230(c)(1), or over third-party content that was taken down, see Section 230(c)(2). See also Geoffrey A. Manne, Ben Sperry, & Kristian Stout, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, 49 Rutgers Computer & Tech. L. J. 26, 39-41 (2022). Section 230 encourages social media companies to use their underlying First Amendment rights to editorial discretion. There is no basis for citing it as a basis for restricting such rights.

*  *  *

The challenged Florida and Texas laws treat social media platforms essentially as company towns. But social media platforms simply do not demonstrate the requisite characteristics sufficient to treat them as company towns whose moderation decisions are subject to court review for viewpoint discrimination. Instead, consistent with their economic function, they are private actors with their own rights to editorial discretion protected from government interference.

III. The Justifications for Common Carriage Regulation Do Not Apply to Social Media Companies.

The law and economics principles described above establish a general rule of the First Amendment that private property owners like social media companies have the right, responsibility, and need in the marketplace to moderate speech on their platforms. It makes no more sense to apply common carriage regulation to social media platforms than it does to treat them as company towns subject to the First Amendment.

Both Florida’s SB 7072 and Texas’s HB 20 are designed to restrict the ability of social media companies to exercise editorial discretion on their platforms. Each State justified its law by comparing social media companies to common carriers. Florida’s legislative findings included the statement that social media platforms should be “treated similarly to common carriers.” Act of May 24, 2021, ch. 2021-32, § 1(6), 2021 Fla. Laws 503, 505. Texas’ legislature found that “social media platforms function as common carriers” and “social media platforms with the largest number of users are common carriers by virtue of their market dominance.” Act of Sept. 9, 2021, ch. 3, § (3)–(4), 2021 Tex. Gen. Laws 3904, 3904.

But simply “[l]abeling” a social media platform “a common carrier .?.?.?has no real First Amendment consequences.” Denver Area Educ. Telecomm. Consortium, Inc. v. FCC, 518 U.S. 727, 825 (1996) (Thomas, J., concurring in the judgment in part and dissenting in part). And nothing about social media platforms justifies the label in any event: Social media platforms do not hold themselves out to the public as common carriers, and social media platforms lack monopoly power.

A. Social media platforms do not hold themselves out to all comers.

Both the Eleventh Circuit in Moody and the Fifth Circuit in Paxton recognized that one characteristic common carriers share is that they hold themselves out as serving all members of the public without individualized bargaining. See Moody, 34 F.4th 1196, 1220 (11th Cir. 2022); Paxton, 49 F.4th at 469.

Major social media companies, however, do not hold themselves out to the public indiscriminately either for users or the type of speech allowed. Unlike a telephone company or the postal service, both of which carry all private communications regardless of the underlying message, social media companies require all users to accept terms of service dealing specifically with speech in order to use the platform. They also maintain the discretion to enforce their rules as they see fit, both curating and editing speech before presenting it to the world.. As the Eleventh Circuit put it in Moody, social media users “are not freely able to transmit messages ‘of their own design and choosing’ because platforms make—and have always made—‘individualized’ content- and viewpoint-based decisions about whether to publish particular messages or users.” Moody, 34 F.4th at 1220 (quoting FCC v. Midwest Video Corp., 440 U.S. 689, 701 (1979)).

Moreover, the very service that online platforms offer to users, and that users accept, is the moderation of speech in one form or another. Instagram allows users to curate feeds of specialized images, and Twitter does the same for specialized microblogs. Without this core moderation service, the services would be essentially useless to users. By contrast, common carriers do not have as a core part of their service the moderation of speech: any moderation of speech is incidental to operation of the service (e.g. removing unruly passengers).

Judge Srinivasan’s concurring opinion in United States Telecom Association v. FCC, 855 F.3d 381 (D.C. Cir. 2017) (denying rehearing en banc), is instructive on this point. The panel there had denied a petition for review of the FCC’s net neutrality order, which applied common carriage regulation to internet service providers. At the rehearing stage, then-Judge Kavanaugh feared the panel’s opinion would allow the government to “impose forced-carriage or equal-access obligations on YouTube and Twitter.” Id. at 433 (Kavanaugh, J., dissenting). Judge Srinivasan sought to allay that fear by explaining: Social media platforms “are not considered common carriers that hold themselves out as affording neutral, indiscriminate access to their platform without any editorial filtering[.]”. Id. at 392 (Srinivasan, J., concurring) (emphasis added). Indeed, even the Internet service providers deemed common carriers there could escape such designation if they acted like social media platforms and exercised editorial discretion and advertised themselves as doing so. See id. at 389-90 (Srinivasan, J., concurring).

Unlike the telegraph, telephone, the postal service, or even email, major social media companies do not hold themselves out to the public as open to all legal speech—they expressly retain their editorial discretion. They have publicly available terms of service that users must agree to before creating profiles that detail what is and is not allowed on their platforms. While common carriers like airlines may be able to eject passengers based upon conduct even where there is a speech element, social media companies retain the right to restrict pure expression that is inconsistent with their community standards. These rules include limitations on otherwise legal speech and disclose that violators may be restricted from use, including expulsion. Br. for Pet’rs, https://netchoice.org/wp-content/uploads/2023/11/No.‌-22-555_NetChoice-and-CCIAs-Brief-Paxton.pdf, at 4-7.

The Fifth Circuit was wrong to minimize social media platforms’ editorial discretion by comparing their efforts to newspapers curating articles and columns. See Paxton, 49 F.4th at 459-60, 492 (noting that more than 99% of content is not reviewed by a human). Miami Herald did not establish a floor on how much a private actor must exercise editorial discretion in order to be protected by the First Amendment. Nor did it specify that a human must review content rather than a company investing in algorithms to help them moderate content. The Fifth Circuit’s reasoning is essentially a “use it or lose it” theory of the First Amendment, which says if social media companies do not aggressively use their editorial discretion rights, then they can lose them. “That is not how constitutional rights work,” however; the “‘use it or lose it’ theory is wholly foreign to the First Amendment.” U.S. Telecom, 855 F.3d at 429 (Kavanaugh, J., dissenting).

Since social media companies do not hold themselves out to the public as open to all speech, they are not common carriers that can somehow be required to carry third party speech contrary to their terms of service.

B. Social media companies lack gatekeeper monopoly power.

Another reason offered for treating social media platforms like common carriers is that some social media companies are alleged to have “dominant market share,” see Biden v. Knight, 141 S. Ct. 1220, 1224 (2021) (Thomas, J., concurring), or in the words of Turner, “gatekeeper” or “bottleneck” market power. See Turner, 512 U.S. at 656.

As shown above, however, Turner is not really about market power but about the unique physical connection that gave cable providers the power to restrict access to content by the flick of a switch. In any case, there is no basis for concluding that social media companies are all monopolists.

A number of major social media companies covered by the Florida and Texas laws are not in any sense holders of substantial market power as measured by share of visits.[9] Neither are companies like reddit, LinkedIn, Tumblr, or Pinterest, who all have even fewer visits. Nonetheless, the challenged laws would apply to such entities based on monthly users at the national level or gross revenue. See Fla. Stat. §501.2041(1)(g)(4) (covered providers must have at least 100 million monthly users or $100 million in gross annual revenue); Tex. Bus. & Com. Code §§ 120.001(1), .002(b) (covered social media platforms have 50 million monthly active users). But raw revenue or user numbers do not show market power. It is, at the very least, market share (i.e., concentration) that could plausibly be instructive—and even then, market power entails a much more complex determination. See, e.g., Brian Albrecht, Competition Increases Concentration, Truth on the Market (Aug. 16, 2023), https://‌truthonthemarket.com/2023/08/16/competition-increases‌-concentration/. As economist Chad Syverson puts it, “concentration is worse than just a noisy barometer of market power. Instead, we cannot even generally know which way the barometer is oriented.” Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions, 33 J. Econ. Persp. 23, 26 (2019).

Second, there is no legislative finding of market power that would justify either law: just a bare assertion by the Texas legislature that “social media platforms with the largest number of users are common carriers by virtue of their market dominance.” HB 20 § 1(4). That “finding” by the Texas legislature fails to even define a relevant market, let alone establish market shares, or identify any indicia of market power of any players in that market. In then-Judge Kavanaugh’s words, both Florida and Texas failed to “even tr[y] to make a market power showing.” U.S. Telecom, 855 F.3d at 418 (Kavanaugh, J., dissenting); see also FTC v. Facebook, 560 F. Supp. 3d 1, 18 (D.D.C. Jun. 28, 2021) (“[T]he FTC’s bare assertions would be too conclusory to plausibly establish market power”).

The Texas legislature’s bare assertion is considerably weaker than the “unusually detailed statutory findings” the Court relied on in Turner, 512 U.S. at 646,^[10] and is woefully insufficient to permit reliance on this justification for common-carrier-like treatment under the First Amendment.

Conclusion

The First Amendment protects the marketplace of ideas by protecting private ordering of speech rules. For the foregoing reasons, the Court should reverse the decision of the Fifth Circuit in Paxton and affirm the decision of the Eleventh Circuit in Moody.

[1] Amicus curiae affirms that no counsel for any party authored this brief in whole or in part, and that no entity or person other than amici and their counsel made any monetary contribution toward the preparation and submission of this brief.

[2] Throughout this brief, the term “platform” as applied to the property of social media companies is used in the economic sense, as these companies are all what economists call multisided platforms. See David S. Evans, Multisided Platforms, Dynamic Competition, and the Assessment of Market Power for Internet-Based Firms, at 6 (Coase-Sandor Inst. for L. & Econ. Working Paper No. 753, Mar. 2016).

[3] Valtteri Vuorio & Zachary Horne, A Lurking Bias: Representativeness of Users Across Social Media and Its Implications for Sampling Bias In Cognitive Science, PsyArXiv Preprint at 1 (Feb. 2, 2023); see also, e.g., Alessia Antelmi, et al., Characterizing the Behavioral Evolution of Twitter Users and The Truth Behind the 90-9-1 Rule, in WWW ’19: Companion Proceedings of The 2019 World Wide Web Conference 1035 (May 2019).

[4] “For decades, the 18-to-34 age group has been considered especially valuable to advertisers. It’s the biggest cohort, overtaking the baby boomers in 2015, and 18 to 34s are thought to have money to burn on toys and clothes and products, rather than the more staid investments of middle age.” Ryan Kailath, Is 18 to 34 still the most coveted demographic?, Marketplace.com Dec. 8, 2017), https://www.market‌place.org/2017/12/08/coveted-18-34-year-old-demographic.

[5] https://www.cnbc.com/2023/11/17/apple-has-paused-advertising-on-x-after-musk-promoted-antisemitic-tweet.html.

[6] https://www.vanityfair.com/news/2023/08/twitter-advert‌isers-dont-want-nazi-problem.

[7] https://www.nytimes.com/2023/06/05/technology/twitter-ad-sales-musk.html.

[8] https://www.zdnet.com/article/twitter-seeing-record-user-engagement-the-data-tells-a-different-story.

[9] See https://www.statista.com/statistics/265773/market-share-of-the-most-popular-social-media-websites-in-the-us (Facebook at 49.9%, Instagram at 15.85%, X/Twitter at 14.69%, YouTube at 2.29%); https://gs.statcounter.com/social-media-stats/all/‌united-states-of-america (similar numbers).

[10] See also Pub. L. 102-385 § 2(a)(1) (detailing price increases of cable television since rate deregulation, which is inferential evidence of market power); id. § 2(a)(2) (explaining that local franchising regulations and the cost of building out cable networks leave most consumers with only one available option).

Amicus respectfully submits this brief in support of Petitioner Apple Inc.[1]

INTEREST OF AMICUS CURIAE

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

ICLE has an interest in ensuring that antitrust law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis. That includes fostering consistency between antitrust law and other laws that proscribe unfair methods of competition, such as California’s Unfair Competition Law, and advising against far-reaching injunctions that could deteriorate the quality of mobile ecosystems, thereby harming the interests of consumers and app developers.

INTRODUCTION AND SUMMARY OF ARGUMENT

This Court has admonished that “injunctive relief should be no more burdensome to the defendant than necessary to provide complete relief to the plaintiffs.” Califano v. Yamasaki, 442 U.S. 682, 702 (1979); see also Application for a Stay at 5, Murthy v. Missouri, No. 23-411 (Sept. 14, 2023) (review granted on government’s stay motion arguing “the injunction sweeps far beyond what is necessary to address any cognizable harm to respondents”). The nationwide injunction issued in this case, which applies to millions of non-party app developers, cannot be reconciled with that principle.

The lower court’s use of a nationwide injunction to address narrow alleged injuries has severe consequences that are best understood through the lens of law and economics principles. The district court recognized that Apple’s walled-garden ecosystem yields procompetitive consumer benefits, including greater privacy and data security, and that such benefits are cognizable under federal antitrust law. Pet. App. 261a-270a. Yet the district court’s nationwide injunction undercuts precisely those benefits. Apple’s practice of vetting unsafe payment systems and malware on its App Store depends on its ability to prevent third parties from “steering” consumers towards purchase mechanisms other than Apple’s secure in-app purchasing (“IAP”) system. In addition, the anti-steering policy prevents free-riding and protects Apple’s incentive to invest in its platform to improve the curation of apps, privacy, safety, and security.

These harms to Apple’s platform are not offset by benefits to consumers, or even to developers taken as a whole. All the injunction does is alter the allocation of app store fees between developers, because even if Apple’s ability to collect a commission through its IAP is limited, Apple would still have the right to collect a commission in other ways for the use of its proprietary software and technology. It could do so by readjusting whom it charges for access to the App Store, and how much it charges.

For instance, rather than charge a commission to developers on paid downloads of apps and on in-app purchases of digital goods and services, as it does now, Apple could instead charge all developers a fee for accessing the App Store. While this might ostensibly benefit big developers who rely heavily on in-app purchases and paid downloads to monetize their apps, it is not at all clear that the net effects would be positive. One thing does seem clear, however: The current model, in which small, free apps pay few fees, would likely cease to be tenable under a nationwide federal injunction.

Put differently, despite not violating federal antitrust law, the district court’s sweeping remedy risks harming the vast majority of app developers, who have not requested the injunction and are now operating on the iOS for free. And it may ultimately harm tens of millions of consumers using Apple’s App Store and iOS.

ARGUMENT

I.              The Injunction Is Unnecessarily Broad and Would Affect Millions of Developers, Not Just Epic

The district court imposed an injunction that affects Apple’s anti-steering provisions across the board, and thus redefines Apple’s relationship with many developers—not just Epic. As it stands, the injunction is overly broad and at odds with established jurisprudence. Gill v. Witford, 138 S. Ct. 1916, 1933-34 (2018); Califano, 442 U.S. at 702. And it reduces consumer welfare by precluding more beneficial conduct than the harmful behavior it deters.

There are about thirty million registered app developers of native iOS apps. Pet. App. 10a. There are about two million apps  available in the United States storefront for the App Store, and most of them were created by third-party developers. See Apple Inc. v. Pepper, 139 S. Ct. 1514, 1519 (2019). All the developers have signed Apple’s guidelines regarding the exclusive use of Apple’s IAP and the related anti-steering provisions. By contrast, the trial evidence established that a little over 100 developers use Epic’s Epic Store. See Pet. App. 115a (citing Trial Tr. 1220:18-20). Yet, the anti-steering injunction would affect all App Store developers. The plaintiff is not even among these developers, because Epic was jettisoned from the App Store in 2020 for introducing an in-app payment system that bypassed Apple’s IAP. Epic has only one subsidiary that is active on the App Store. See Pet. App. 12a; D.Ct. ECF No. 825-8.

It is thus unclear why the district court found it necessary to issue an injunction covering all developers who are licensed to make iOS apps for the App Store’s U.S. storefront, not just Epic’s subsidiary and the approximately 100 developers who use the Epic Store.

Two considerations are especially pertinent. First, Califano precludes the Ninth Circuit’s erroneous assertion that an injunction need only be “tied to Epic’s injuries.” Pet. App. 82a; Califano, 442 U.S. at 702. Indeed, as the government argued in a recently granted petition that raises similar issues, an overbroad injunction cannot be justified on the theory that the non-parties are simply incidental beneficiaries of the injunction for the prevailing parties. Application for a Stay, supra, at 34-36; see Order Granting Review & Order Granting Stay, Murthy v. Missouri, No. 23-411 (Oct. 20, 2023). Instead, “[i]njunctive relief may ‘be no more burdensome to the defendant than necessary to provide complete relief to the plaintiffs.’” Id. at 34-35 (quoting Califano, 442 U.S. at 702).

Second, Apple already settled a class-action lawsuit with developers regarding developer-consumer communications. As part of the Cameron v. Apple Inc. settlement, Apple deleted a prohibition on targeted communication between developers and consumers outside of the app, meaning that developers are now free to communicate outside the apps about external purchasing options (or anything else). See Order: Granting Motion for Final Approval of Class Action Settlement; Granting in Part and Denying in Part Mot. for Attorney’s Fees, Costs, and Service Award; and Judgment at 13, Cameron v. Apple Inc., No. 19-cv-03074 (N.D. Cal. June 10, 2022), ECF No. 491. That settlement, spurred by a properly certified Rule 23 class action representing around 6,700 app developers, did not, however, require Apple to modify or remove the anti-steering provision at issue here (links and buttons within apps). See Declaration of Steve W. Berman in Support of Developer Plaintiffs’ Motion for Preliminary Approval of Settlement with Defendant Apple Inc. at 7-41, Cameron v. Apple Inc., No. 19-cv-3074 (Aug. 26, 2021), ECF No. 396-1.

It is jarring that the courts would now issue a much broader injunction in a case involving a single plaintiff. This could cause serious harm to nonparties who had no opportunity to argue for more limited relief. Zayn Siddique, Nationwide Injunctions, 117 Colum. L. Rev. 2095, 2125 (2017). And it also raises the question whether such a blanket remedy is even necessary given that Cameron v. Apple strikes a balance between Apple’s ability to safeguard its investments and maintain the safety and security of its ecosystem, and app developers’ ability to steer users to alternative payment systems. That agreement was found acceptable by Apple and some 6,700 app developers. Why should it be overridden by an injunction in a case involving a single plaintiff, when app developers have already had the opportunity to join a properly certified class action before, and have either chosen not to do so or have agreed to a different settlement? Further, if a single plaintiff’s allegations of harm can undercut a court-approved, negotiated settlement involving a much larger number of plaintiffs, that diminishes the incentives of parties to fashion and negotiate reasonable settlements in the first instance.

A broad injunction may well be warranted when it is difficult to separate the parties affected by the enjoined conduct from those that are not. But this is not the case here. The identity of the parties that have supposedly been harmed is clear—they are, at most, Epic’s subsidiary and the approximately 100 developers that use the Epic Store. Even if the district court’s conclusions regarding harm to Epic’s subsidiary and other developers with apps on the Epic Store were correct, it would be easy—and necessary—to carve a much narrower remedy than the one the district court imposed. See Barr v. Am. Ass’n of Pol. Consultants, Inc., 140 S. Ct. 2335, 2354-55 (2020).

Overly broad injunctions represent a Constitutional threat, as several members of this Court have warned. See, e.g., United States v. Texas, 143 S. Ct. 1964, 1980 (2023) (Gorusch, J., concurring); Trump v. Hawaii, 138 S. Ct. 2392, 2425 (2018) (Thomas, J., concurring); see also Lewis v. Casey, 518 U.S. 343, 360 (1996). “[G]ranting a remedy beyond what [is] necessary to provide relief to [the plaintiff is] improper.” Lewis, 518 U.S. at 360. In addition to such constitutional implications, overly broad injunctions also raise problems from a law and economics perspective such as hindering and even destroying beneficial conduct. If an injunction is not properly tailored, the beneficial conduct which it precludes may be greater than the harmful conduct which it prevents, resulting in a loss to both total social welfare and consumer welfare.

II.           Platforms Have Legitimate Business Reasons for Anti-Steering Provisions

By casting an overly wide net, the district court’s injunction throws the proverbial baby out with the bathwater. Anti-steering provisions are commonly used by digital platforms and other businesses because they serve a series of legitimate aims, such as allowing for the recoupment of investments. They also result in tangible procompetitive benefits, such as increased privacy, security, and market-wide output. These rules can be procompetitive, as this Court has recognized. Ohio v. Am. Express Co., 138 S. Ct. 2274, 2289 (2018) [hereinafter Amex].

Absent intervention by this Court, Apple will have to comply with a nationwide injunction that risks diminishing these benefits. If the decision is not corrected, the precedent could have a harmful ripple effect, subjecting other platforms to overly broad injunctions against anti-steering provisions, even though those anti-steering provisions may help sustain and improve the overall quality of those platforms.

A.            The framework for assessing competitive effects in a two-sided market requires a broad examination of the market as a whole

The district court properly found that Apple’s procompetitive justifications for the anti-steering provisions in its IAP system outweighed any anticompetitive effects of those provisions. In fact, Epic failed to make even a prima facie case under the requisite rule-of-reason analysis, as Epic failed to show that Apple’s app distribution and IAP system caused the significant, market-wide competitive harm that the Supreme Court deemed necessary to a showing of anticompetitive harm in Amex.

In Amex, the Court recognized the importance of platform economics and network effects to understanding the market and competitive effects at issue. Two-sided platforms intermediate between two groups, offering a different product or service to each. 138 S. Ct. at 2280 (citing e.g., David Evans & Richard Schmalensee, Markets with Two-Sided Platforms, 1 Issues in Competition L. & Pol’y 667 (2008); David Evans & Michael Noel, Defining Antitrust Markets When Firms Operate Two-Sided Platforms, 2005 Colum. Bus. L. Rev. 667 (2005)).

The Court noted that two-sided platforms are characterized by indirect network effects, where the value of the platform to each group depends on the scale of, or number of members in, the other. Id. at 2280-81. Specifically, the Court observed that “two-sided transaction platforms exhibit more pronounced indirect network effects and interconnected pricing and demand.” Id. at 2286 (emphasis added) (citing Benjamin Klein et al., Competition in Two-Sided Markets: The Antitrust Economics of Payment Card Interchange Fees, 73 Antitrust L.J. 571, 583 (2006)). Hence, “[e]valuating both sides of a two-sided transaction platform is . . . necessary to accurately assess competition.” Id. at 2287.

B.            Anti-steering provisions can be procompetitive

At issue in Amex were various anti-steering provisions American Express had placed in its contracts with merchants. The plaintiffs had alleged that the anti-steering provisions violated Section 1 of the Sherman Act. 138 S. Ct. at 2283. But in Amex, the Court recognized that “there is nothing inherently anticompetitive about . . . antisteering provisions.” Id. at 2289. Those vertical provisions can, among other things, prevent merchants from free-riding, thereby increasing the availability of “‘tangible or intangible services or promotional efforts’ that enhance competition and consumer welfare.” Id. at 2290 (quoting Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 890-91 (2007)).

As in Amex, understanding the competitive effects of conduct between the platform and parties on either side of the platform—for example, vertical agreements between the IAP and app developers—requires examining effects on the system as a whole. And just as in Amex, there are legitimate, procompetitive reasons for anti-steering provisions.

First, as discussed above, anti-steering provisions help prevent free-riding. Simply put, “free-riding” occurs when someone uses a valuable resource without paying for it. Free-riding—even the potential for free-riding—tends to undermine incentives to provide the resource in the first place, as well as incentives to improve it in later development. It presents an especially serious challenge to the provision of goods or services where it is difficult to exclude those who have not paid, as with city parks or policing. Everyone, even those who would be willing to pay if they had to, has an incentive to avoid fees. Thus, where free-riding is possible, desirable goods and services tend to be underfunded, reducing their provision (or, in antitrust terms, output), or, in the alternative, are provided dependent on government subsidy. The most common solution to free-rider problems is to create ways to exclude those who are unwilling to pay.

In this case, Apple owns a valuable resource that it has created and steadily improved—the iPhone and iOS ecosystem, including the App Store. Apple currently charges commissions between 15% and 30% for digital goods sold through the App Store, including for certain in-app purchases. Epic would like to access that ecosystem without paying. But while Epic may benefit from its long-term strategy to reduce the fees it pays to Apple, consumers might not. If reductions in revenue from the iOS ecosystem mean that Apple has less incentive to invest in it, Epic’s gain may come at the consumer’s expense.

The district court correctly rejected Epic’s main claim, as Epic failed to establish cognizable harm under the antitrust laws. That foreclosed Epic’s ability to directly circumvent the App Store and pay a lower commission, or none at all. In granting a nationwide injunction against Apple’s anti-steering provisions, the district court facilitated precisely the type of free-riding that failed to gain traction under federal antitrust law. Doing so will greatly exacerbate any free-rider problem Epic itself might have caused Apple, to the likely detriment of many developers and most consumers.

The situation is further complicated by the fact that the district court’s injunction is vaguely written and is thus likely to be interpreted quite differently by different parties. Ultimately, if it allows app developers to link users outside of the in-app payments flow, and bypass Apple’s IAP fees, it will further enable free-riding and undermine Apple’s incentives to invest in iOS, iPhones, and iPads. And the injunction could undermine the incentive for Apple’s competitors to develop whatever products might someday displace the current ones through competition.

Second, as a two-sided market, the App Store is valuable only because it is used by both consumers and developers, and Apple has to balance both sides of the market. The risk of developers leaving the iOS ecosystem creates a built-in ceiling on the prices Apple can charge, as users will be less inclined to pay for Apple products if valuable apps are not there. The commission-fee business model gives Apple and other platforms significant incentives to develop new distribution mediums (like smart TVs, for example) and to improve existing ones. Such development expands the audience that software can reach.

Apple’s “closed” distribution model also allows the company to curate the App Store’s apps and payment options. For example, Apple’s guidelines exclude apps that pose data security threats, threaten to impose physical harm on users, or undermine child-safety filters. These rules increase trust between users and previously unknown developers, because users do not have to fear their apps contain malware. They also reduce user fears about payment fraud. Rivals could free-ride on Apple’s curation by mimicking its decisions and undercutting it on price. Doing so does not enhance competition on the merits: It eviscerates it by eroding Apple’s incentives to enforce such rules.

Apple’s closed business model also enables it to maintain a high standard of performance on iOS devices by excluding apps and payment systems that might slow devices or crash frequently. Users may not know when device performance is affected by a given app or purchase mechanism, so an open system would mean the potential for apps that crash the entire device. Apple’s closed model ensures that unscrupulous developers cannot impose negative externalities on the entire ecosystem.

By increasing the total value of the platform, these benefits also increase the number of market-wide transactions. In a two-sided market, it is output—not prices—that tells us what is happening on the market as a whole, and it is therefore output that should be used as the relevant parameter to determine whether conduct is procompetitive or anticompetitive. “What is material is whether Apple’s overall pricing structure reduces output by deterring app developers from participating in the market or users from purchasing apps (or iOS devices at all) because of the amount of the app developer commission.” Geoffrey A. Manne & Kristian Stout, The Evolution of Antitrust Doctrine After Ohio v. Amex and the Apple v. Pepper Decision That Should Have Been, 98 Neb. L. Rev. 425, 457 (2019). Notably, the district court found that it could not ascertain whether Apple’s alleged restrictions had “a negative or a positive impact on game transaction volume.” Pet. App. 253a; see also id. (“no evidence that a substantial number of developers actually forego making games because of Apple’s commission.”); id. at 319a (finding Epic failed to show reduction in output and that “[t]he record contains substantial evidence that output has increased.”).

Ultimately, however, the benefits of anti-steering provisions are obvious only if one adopts the correct, holistic vision of app stores as a two-sided market; conversely, they appear less relevant if one applies “one-sided logic in two-sided markets.” Julian Wright, One-sided Logic in Two-sided Markets, 3 Review of Network Econ. 44, 45-51 (2004). In this sense, in a two-sided market, anti-steering provisions can reduce transaction friction and bolster security and safety, thereby improving the platform’s overall quality and, ultimately, attracting more users. See Amex, 138 S. Ct. at 2889 (sustaining similar anti-circumvention rules as procompetitive for these reasons). Developers may get a smaller share of revenues, but it is a smaller slice of a much larger pie. Thus, while the ability to circumvent Apple’s commission fee can, on the surface, appear to benefit some developers, in the longer term most developers and consumers will be worse off.

Apple’s anti-steering provisions increase safety and curation, and an injunction against them can reduce the overall value of Apple’s platform. That would in turn discourage developers and users from using the iOS ecosystem, and would prompt a downward spiral in quality and choice for both sides of the market—which would depreciate the value of the platform even further.

C.            Open and closed platforms are not inherently good or bad: They represent alternative business models with potential advantages and disadvantages

Any comparison between “open” and “closed” platforms should account for the fact that there are tradeoffs between the two; it should not simply assume that “open” equals “good” while “closed” equals “bad.” Such analysis also must consider tradeoffs among consumers, and among developers, in addition to tradeoffs between developers and consumers. More vigilant users might be better served by an “open” platform because they find it easier to avoid harmful content; less vigilant ones may want more active assistance in screening for malware, spyware, or software that simply isn’t optimized for the user’s device.

There are similar tradeoffs on the developer side: Apple’s model lowers the cost to join the App store, which especially benefits smaller developers and those whose apps fall outside the popular gaming sector. In short, the IAP fee cross-subsidizes the delivery of services to the approximately 80% of apps on the App Store that are free to consumers and pay no IAP fees.

Centralized app distribution and Apple’s “walled garden” model (including IAP) increase interbrand competition because they are at the core of what differentiates Apple from Android, the other major competing platform. 1-ER-148–49. They play into Apple’s historical business model, which focuses on being user-friendly, reliable, safe, private, and secure. 1?ER-86; see also 1-ER-107 (recognizing that the safety and security of Apple’s closed system is a “competitive differentiator for its devices and operating system”). Even Epic recognized that Apple would lose its competitive advantage if it were to compromise its safety and security features. 1-ER-48 n.250 (noting Epic’s expert, Susan Athey, testified that “privacy and security are competitive differentiators for Apple”).

For Apple and its users, the touchstone of a good platform is not “openness,” but carefully curated selection and security, understood broadly as encompassing the removal of objectionable content, protection of privacy, and protection from “social engineering,” and the like. 1-ER-148–49. By contrast, Android’s bet is on the open platform model, which sacrifices some degree of security for the greater variety and customization associated with more open distribution. These are legitimate differences in product design and business philosophy. See Andrei Hagiu, Proprietary vs. Open Two-Sided Platforms and Social Efficiency 2-3 (AEI-Brookings Joint Ctr. for Regul. Stud., Working Paper No. 06-12, 2006) [hereinafter Proprietary vs. Open Platforms] (explaining that there is a “fundamental welfare tradeoff between two-sided proprietary . . . platforms and two-sided open platforms, which allow ‘free entry’ on both sides of the market” and thus “it is by no means obvious which type of platform will create higher product variety, consumer adoption and total social welfare”) (emphasis omitted); Jonathan M. Barnett, The Host’s Dilemma: Strategic Forfeiture in Platform Mkts. for Informational Goods, 124 Harv. L. Rev. 1861, 1927 (2011) (“Open systems may yield no net social gain over closed systems, can impose a net social loss under certain circumstances, and . . . can impose a net social gain under yet other circumstances.”).

Because consumers and developers could reasonably prefer either ecosystem, it is not clear that loosening Apple’s control over the App Store would necessarily lead to more app transactions market wide. Indeed, in a two-sided market context, a proprietary platform like Apple’s “may in fact induce more developer entry (i.e. product variety), user adoption and higher total social welfare than an open platform.” Proprietary vs. Open Platforms, at 15-16. In other words, preventing certain apps from accessing the App Store, and preventing certain transactions from taking place on it, may ultimately have increased the number of apps and transactions on Apple’s platform, because doing so made it attractive to a wider set of consumers and developers.

Yet the injunction brings Apple’s iOS closer to an “open” system, effectively rendering Apple’s platform more similar to Android’s. The district court found that Apple did not have a monopoly, yet under the guise of fostering competition on Apple’s platform the injunction eliminates competition where it matters most—at the interbrand, systems level between Apple and Android. See Michael L. Katz & Carl Shapiro, Systems Competition and Network Effects, 8 J. Econ. Persps. 93, 110 (1994), (“[T]he primary cost of standardization is a loss of variety: consumers have fewer differentiated products to pick from, especially if standardization prevents the development of promising but unique and incompatible new systems”). By limiting intrabrand competition, in other words, Apple ultimately promotes interbrand competition. 1-ER-148–49. Again, Amex provides useful insight here, because the Court noted that the business model had “spurred robust interbrand competition,” while increasing both the quality and quantity of transactions. Amex, 138 S. Ct. at 2290.

D.            Anti-steering provisions are a legitimate way of recouping a platform’s investments

Anti-steering provisions are a legitimate way for a platform to recoup its investments. Epic has argued that Apple could simply lift restrictions on the use of third-party IAP processors (e.g., Visa and MasterCard), but still be appropriately compensated for the use of its intellectual property, ensure that iPhone users’ IAP are sufficiently secure, and guarantee quality. 1-ER-153; Epic 9th Cir. Br. 44-47. But exactly how Apple could achieve these ends without increasing its costs is a question Epic has not even tried to answer. See, e.g., 1-ER-151–52 (noting that Epic’s requests for relief “leave unclear whether Apple can collect licensing royalties and, if so, how it would do so”); 1-ER-153 & n.617 (noting it would “be more difficult” and more costly for Apple to collect commission without the IAP system). Nor did Epic, the Epic amici, or the district court properly address the effect of the proposed less restrictive alternatives on consumers rather than competing developers. See 1-ER-148 n.605 (noting it is “unclear the extent or degree to which developers would pass on any savings to consumers”).

Consistent with Epic’s proposed approach, Apple could allow independent payment processors to compete, and charge an all-in fee of 30% when Apple’s IAP is chosen. To recoup the costs of developing and running its App Store, Apple could then charge app developers a reduced, mandatory per-transaction fee (on top of developers’ “competitive” payment to a third-party IAP provider) when Apple’s IAP is not used. Indeed, where a similar remedy has been imposed already, Apple has taken similar steps. In the Netherlands, for example, where Apple is required by the Authority for Consumers and Markets to uncouple distribution and payments for dating apps, Apple has adopted a policy under which any apps that want to use a non-Apple payment provider must still “pay Apple a commission on transactions” that is 3% less than normal (so 27% for most transactions), a slightly “reduced rate that excludes value related to payment processing and related activities.” Apple, Distributing Dating Apps in the Netherlands, (last visited Oct. 26, 2023).

III.         A State Law Should Not Undermine the Fundamental Goals of Federal Antitrust Policy

When assessing the effects of Apple’s anti-steering provisions, the courts should not ignore Federal antitrust law and, especially, the effects on competition and consumers. In other words, the fact that anti-steering provisions are procompetitive should be a relevant factor in whether a federal court grants nationwide injunctive relief. To interpret California’s Unfair Competition Law (“UCL”) as the district court has done—in a way that is at loggerheads with federal antitrust law but yet permits a nationwide injunction—is to undermine the fundamental goal of antitrust policy, and to do so on a national level. As the Court has observed, “The heart of our national economic policy long has been faith in the value of competition.” Nat’l Soc’y of Prof. Eng’rs v. United States, 435 U.S. 679, 695 (1978) (quoting Standard Oil Co. v. FTC, 340 U.S. 231, 248 (1951)).

The district court recognized Apple’s security arguments as a key procompetitive factor that determines Apple’s success and increases output across the platform, ultimately benefitting both consumers and developers. Yet the court issued an unnecessarily broad injunction against Apple’s anti-steering provisions that risks chilling procompetitive conduct by deterring investment in efficiency-enhancing business practices, such as Apple’s “walled-garden” iOS (see sections II.B and II.D on the procompetitive benefits of anti-steering provisions). See also Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (“[F]alse condemnations ‘are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’”) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)).

Even more egregiously, perhaps: It risks undermining federal antitrust law by enjoining conduct under state unfair competition law that is recognized as benign—and even beneficial—under federal antitrust law. If the district court’s remedy is left to stand, state laws will be stretched beyond their territorial remit and used to contradict federal antitrust laws nationally, thus eviscerating federal antitrust policy from the bottom-up. This is not a hypothetical threat, either: California has already expressed its intent to use the UCL to “seek nationwide injunctions” on the same theory as the ruling below. Michael Acton, Epic Games-Apple US Appeals Court Ruling Shows Power of California’s Competition Law, Blizzard Says, MLex (May 10, 2023).

The district court erred in finding Apple’s anti-steering provision “unfair” despite a concurrent finding that there is no incipient antitrust violation. And a nationwide injunction based on that finding lifts what could have been a relatively contained mistake to the national level, and thereby magnifies it.

This is misguided from an antitrust perspective because it undermines some of the procompetitive benefits that anti-steering provisions in closed two-sided platforms can give to consumers and app developers. A national injunction that subverts Apple’s ability to charge a commission for the use of its software and technology through paid apps and in-app payments might also alter the current balance between the two sides of the App Store, to the detriment of smaller developers of free apps. In this zero-sum game, the gain of a handful of developers who rely on paid downloads of apps and frequent in-app purchases by users will come at the expense of the majority who do not.

CONCLUSION

For the foregoing reasons, this Court should grant Apple’s petition for a writ of certiorari.

[1] Amicus notified counsel for the parties of its intent to file this brief more than ten days before the deadline. No counsel in this matter for any party authored this brief in whole or in part, and no person other than amicus or its counsel have made any monetary contribution intended to fund the preparation or submission of this brief.

ICLE President Geoff Manne joined the Tech Policy Podcast to discuss the Federal Trade Commission’s lawsuit against Amazon. Audio of the full episode is embedded below.

tl;dr

Background: The Federal Trade Commission (FTC) and 17 states this month filed a major antitrust complaint against Amazon. The much-anticipated suit comes more than two years after Lina Khan became FTC chair and more than six years since her student note criticizing Amazon’s practices. The complaint describes a broad scheme in which Amazon (1) used various practices to prevent sellers from offering prices at Amazon’s rivals below the level at Amazon (anti-discounting), and (2) conditioned a product’s eligibility for Amazon Prime on whether the seller used Fulfillment by Amazon (FBA). This conduct allegedly violates Section 5 of the FTC Act as an unfair method of competition, Section 2 of the Sherman Act as maintenance of monopoly, and various state laws.

But… It will be difficult for the FTC and the states to prove Amazon’s monopoly power and to discredit the procompetitive justifications for the challenged conduct. Retail competition is robust and the proposed narrow markets are ripe for criticism. Moreover, the challenged conduct is core to Amazon’s offer of important consumer benefits, such as fast and reliable shipping. Whatever remedy the FTC ultimately pursues, it risks undermining the benefits Amazon has created for consumers and sellers alike.

KEY TAKEAWAYS

SEEMINGLY TRADITIONAL THEORIES OF HARM

The complaint relies on two overarching theories of anticompetitive conduct: anti-discounting and conditioning Prime eligibility on a seller using FBA.

The first is reminiscent of a challenge to “most-favored nation” (MFN) provisions, in which a defendant demands terms that are equivalent to or better than those given to its rivals. However, MFNs are agreements typically challenged under Section 1 of the Sherman Act; the FTC doesn’t explicitly claim that Amazon’s unilateral policy constitutes an MFN.

The second theory appears similar to a tying claim. But the FTC doesn’t allege an actual tie between the sale of two distinct products, perhaps because sellers cannot buy the Prime badge; they must qualify for it by meeting the two-day shipping requirement (which FBA ensures).

NARROW RELEVANT MARKETS

Both of the relevant markets put forward in the FTC’s complaint fail to reflect real-world competition.

Amazon allegedly possesses monopoly power in the “online superstore market.” According to the FTC, online “superstores” provide a unique breadth and depth of products and unique services that brick-and-mortar stores and smaller online retailers don’t. Thus the commission alleges that these rivals cannot constrain Amazon’s market power over consumers. 

This alleged market is so narrowly drawn that it appears to include just Amazon, eBay, and the online stores offered by Walmart and Target. This excludes single-brand online retailers, product-category-specific online retailers, and all brick-and-mortar stores. It beggars belief that these rivals don’t exert competitive constraints on Amazon. After all, no consumers shop exclusively online, and price-comparison services like Google Shopping facilitate shopping across all online outlets. This will almost certainly prove to be a sticking point when the case goes to trial.

The FTC also defines a relevant market for “online marketplace services”—i.e., the services needed to sell products online (including access to shoppers, online interface, pricing capabilities, customer reviews). This excludes traditional wholesalers and e-commerce platforms like Shopify that offer software allowing sellers to create their own online stores.

As with the first market, it’s hard to imagine these claims will be borne out by the evidence. Most retail sales still occur offline and manufacturers and brands readily access these outlets. And the recent success of new marketplaces like Shein and Temu—which entered the U.S. market during the FTC’s investigation of Amazon—further undermines both the alleged market and Amazon’s market power.

OVERLOOKING THE BENEFITS OF AMAZON’S CONDUCT

While both unlawful MFNs and unlawful tying would be legitimate theories of harm, both are also vertical restrictions reviewed under the rule of reason, which requires weighing the anticompetitive and procompetitive effects.

The economics literature shows that MFNs can promote efficiency by protecting investments that couldn’t have been recouped without the protections offered by an MFN, such as Amazon’s substantial investment in the infrastructure to deliver products within two days. These provisions can benefit consumers by cutting their search costs and offering retailers incentives to improve the quality of their search and display capabilities.

Economic theory also suggests that it can be cheaper to offer some products together, rather than selling them separately; in some cases, it may be necessary to sell the products together in order to offer the products at all. If Amazon’s FBA services are critical for it to dependably deliver on Prime’s promise of two-day-shipping, then the alleged tying may be procompetitive. 

RESTORING ‘FAIR COMPETITION’

While the FTC’s complaint doesn’t explicitly ask for Amazon to be broken up, it does ask for the court to provide “equitable relief, including but not limited to structural relief, necessary to restore fair competition.” 

It’s anyone’s guess what this means. “Fair competition” isn’t part of U.S. antitrust case law or mainstream economic terminology.

This seemingly innocuous wording may be used to impose the FTC’s idiosyncratic—and nostalgic—vision of online retail on Amazon. Worse, it may be a euphemism for breaking up the company.

 

The Federal Trade Commission and 17 states have filed a high-profile antitrust lawsuit against Amazon that could force major changes to the popular Amazon Prime service — which would be bad news for its 167 million American members.

Read the full piece here.

There is much in the Federal Trade Commission’s (FTC) record over the past two years that could be categorized as abnormal. There is, for instance, nothing “normal” about using the threat of excessive force to cower businesses into submission. Introducing sky high costs for the filing of mergers isn’t normal, as it will scare away merging parties. These are attempts at regulation by intimidation.

Read the full piece here.

Introduction

We appreciate the opportunity to comment on some of the changes made by the Competition (the Amendment) Act, 2023 (Amendment Act) to India’s Competition Act of 2002 (the Act).

The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center—based in Portland. Oregon, United States—founded to build the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies, and economic findings, to inform public policy. More specifically, ICLE and its affiliate scholars have written extensively about competition and merger policy and routinely engage with policymakers and academics across the globe on these issues.

The Amendment raises several important issues, but our comments focus on the new notification criteria for M&A deals. The Amendment adds a new notification threshold to Section 5 of the Act, which outlines when parties need to notify their merger to the Competition Commission of India. Under the new Section 5 (d), parties must notify a transaction when:

“(d) value of any transaction, in connection with acquisition of any control, shares, voting rights or assets of an enterprise, merger or amalgamation exceeds rupees two thousand crore:

Provided that the enterprise which is being acquired, taken control of, merged or amalgamated has such substantial business operations in India as may be specified by regulations.[1]

These new thresholds appear designed to catch certain startup acquisitions that would otherwise escape merger review because the target firm has little to no turnover or assets. In other words, the amendment adds a new threshold that aims to ensure potential “killer acquisitions” are reviewed by enforcers.

But while attempting to catch transactions that may harm consumers is commendable, it is important to understand the important tradeoffs that ensue. Policing mergers is anything but costless and any change in merger policy should consider both the benefits and the costs. Agencies will need to devote time and resources to assess mergers that previously were waved through without review. In turn, absent significantly more resources, this will reduce the review time devoted to the most problematic deals. Looking outside the agency, it will also increase the cost of mergers for parties, thereby chilling all deals, even procompetitive deals.

Our comment analyzes these tradeoffs in more detail, ultimately concluding that lower merger=filing thresholds may be inappropriate when viewed through the lens of the error-cost framework. Section I puts the Amendment in a global context, explaining the impetus for and weakness of attempts to bolster merger enforcement around the world. Section II outlines some of the implications of the error-cost framework for merger policy. Section III concludes by putting forward four questions that policymakers should ask themselves when they amend merger-enforcement law and policy.

I.        The Global Crackdown on Mergers

The antitrust policy world has fallen out of love with corporate mergers. After decades of relatively laissez-faire enforcement, spurred in part by the emergence of Chicago school of economics,^[2] a growing number of policymakers and scholars are calling for tougher rules to curb corporate acquisitions. But these appeals are premature. There is currently little evidence to suggest that mergers systematically harm consumer welfare. More importantly, scholars fail to identify alternative institutional arrangements that could capture the anticompetitive mergers that evade prosecution without disproportionate false positives and administrative costs. Their proposals thus fail to meet the requirements of the error-cost framework.

Taking a step back, there are multiple reasons for the antitrust community’s about-face. These include concerns about rising market concentration,^[3] labor-market monopsony power,^[4] and of large corporations undermining the very fabric of democracy.^[5] But of these numerous (mis)apprehensions, one has received the lion’s share of scholarly and political attention: a growing number of voices argue that existing merger rules fail to apprehend competitively significant mergers that either fall below existing merger-filing thresholds or affect innovation in ways that are, allegedly, ignored by current rules. For instance, Rohit Chopra, a former commissioner at the US Federal Trade Commission, asserted that too many transactions avoid antitrust scrutiny by falling through the cracks of HSR premerger notification thresholds. For instance, Rohit Chopra, a former commissioner at the U.S. Federal Trade Commission, asserted that too many transactions avoid antitrust scrutiny by falling through the cracks of the Hart-Scott-Rodino Act’s premerger-notification thresholds. As a result, Chopra claimed, “[t]he FTC ends up missing a large number of anticompetitive mergers every year.”^[6]

These fears are particularly acute in the pharmaceutical and tech industries, where several high-profile academic articles and reports claim to have identified important gaps in current merger-enforcement rules, particularly with respect to acquisitions involving nascent and potential competitors.^[7] Some of these gaps are purported to arise in situations that would normally appear to be procompetitive:

Established incumbents in spaces like tech, digital payments, internet, pharma and more have embarked on bids to acquire features, businesses and functionalities to shortcut the time and effort they would otherwise require for organic expansion. We have traditionally looked at these cases benignly, but it is now right to be much more cautious.^[8]

As a result of these perceived deficiencies, scholars and enforcers have called for tougher rules, including the introduction of lower merger filing thresholds—similar to what is currently proposed with regard to India’s proposed reform of its merger rules—and substantive changes, such as the inversion of the burden of proof when authorities review mergers and acquisitions in the digital platform industry.^[9] As a result of these perceived deficiencies, scholars and enforcers have called for tougher rules, including the introduction of lower merger-filing thresholds—similar to what has been put forward in India’s proposed reform of its merger rules—and substantive changes, such as the inversion of the burden of proof when authorities review mergers and acquisitions in the digital-platform industry.^[10] Meanwhile, and seemingly in response to the increased political and advocacy pressures around the issue, U.S. antitrust enforcers have recently undertaken several enforcement actions directly targeting such acquisitions.^[11] Meanwhile, and seemingly in response to the increased political and advocacy pressures around the issue, U.S. antitrust enforcers have recently undertaken several enforcement actions that directly target such acquisitions.^[12]

These proposals, however, tend to overlook the important tradeoffs that would ensue from attempts to decrease the number of false positives under existing merger rules and thresholds. While merger enforcement ought to be mindful of these possible theories of harm, the theories and evidence are not nearly as robust as many proponents suggest. Most importantly, there is insufficient basis to conclude that the costs of permitting the behavior they identify is greater than the costs would be of increasing enforcement to prohibit it.^[13]

In this regard, two key strands of economic literature are routinely overlooked (or summarily dismissed) by critics of the status quo.

For a start, as Judge Frank Easterbrook argued in his pioneering work on The Limits of Antitrust, antitrust enforcement is anything but costless.^[14] In the case of merger enforcement, not only is it expensive for agencies to detect anticompetitive deals but, more importantly, overbearing rules may deter beneficial merger activity that creates value for consumers. Indeed, not only are most mergers welfare-enhancing, but barriers to merger activity have been shown to significantly, and negatively, affect early company investment.^[15]

Second, critics are mistaking the nature of causality. Scholars routinely surmise that incumbents use mergers to shield themselves from competition. Acquisitions are thus seen as a means to eliminate competition. But this overlooks an important alternative. It is at least plausible that incumbents’ superior managerial or other capabilities (i.e., what made them successful in the first place) make them the ideal purchasers for entrepreneurs and startup investors who are looking to sell.

This dynamic is likely to be amplified where the acquirer and acquiree operate in overlapping lines of business. In other words, competitive advantage, and the ability to profitably acquire other firms, might be caused by business acumen rather than exemplifying anticompetitive behavior. And significant and high-profile M&A activity involving would-be competitors may thus be the procompetitive byproduct of a well-managed business, rather than anticompetitive efforts to stifle competition.

Critics systematically overlook this possibility. Indeed, Henry Manne’s seminal work on Mergers and Market for Corporate Control^[16]—the first to argue that mergers are a means of applying superior management practices to new assets—is almost never cited by contemporary researchers in this space. Our comments attempt to set the record straight.

With this in mind, we believe that calls to reform merger enforcement rules and procedures should be analyzed under the error-cost framework. With this in mind, we believe that calls to reform merger-enforcement rules and procedures should be analyzed under the error-cost framework. Accordingly, the challenge for policymakers is not merely to minimize type II errors (i.e., false acquittals), which have been a key area of focus for recent scholarship, but also type I errors (i.e., false convictions) and enforcement costs. This is particularly important in the field of merger enforcement, where authorities need to analyze vast numbers of transactions in extremely short periods of time.

In other words, while scholars have raised valid concerns, they have not suggested alternative institutional arrangements to address them that would lead to better overall outcomes. In other words, while scholars have raised valid concerns, they have not suggested alternative institutional arrangements to address those concerns that would lead to better overall outcomes. All legal enforcement systems are imperfect, and it is not enough to justify changes to the system that some imperfections can be identified.^[17] Indeed, it could be that antitrust doctrine currently condones practices that harm innovation, but that there is no cost-effective way to reliably identify and deter this harmful conduct.

For instance, as we discuss below, a recent paper estimates that between 5.3% and 7.4% of pharmaceutical mergers are “killer acquisitions.”^[18] But even if that is accurate, it suggests no tractable basis on which those acquisitions can be differentiated ex ante from the 92.6% to 94.7% that are presumed to be competitively neutral or procompetitive. A reformed system that overly deters these acquisitions in order to capture more of the problematic ones—which is presumably the purpose of the merger-related amendments in the 2023 Competition Act— is not necessarily an improvement.

Further, while many of the arguments suggesting that the current system is imperfect are well-taken, these claims of systemic problems are not always as robust as proponents suggest. This further weakens the case for policy reform, because any potential gains from such reforms are likely far less certain than they are often claimed to be.

II.      Antitrust and the Error-Cost Framework

Firms spend trillions of dollars globally every year on corporate mergers, acquisitions, and R&D investments.^[19] Most of the time, these investments are benign, often leading to cost reductions, synergies, new or improved products, and lower prices for consumers.^[20] For smaller firms, the possibility of being acquired can be vital to making a product worth developing.

There are also instances, however, when M&A activity enables firms to increase their market power and reduce output. Therein lies the fundamental challenge for antitrust authorities: among these myriad transactions, investments, and business decisions, is it possible to effectively sort the wheat from the chaff in a way that leads to net improvements in efficiency and competition, and ultimately consumer welfare? In more concrete terms, the question is: are there reasonable rules and standards that enforcers can use to filter out anticompetitive practices while allowing beneficial ones to follow their course? And if so, can this be done in a timely and cost-effective manner?^[21]

A.      The Use of Filters in Antitrust

What might appear to be a herculean task has, in fact, been considerably streamlined, and vastly improved, by the emergence of the error-cost framework, itself a byproduct of pioneering advances in microeconomics and industrial organization.^[22] This is “the economists’ way out.”^[23] The error-cost framework is designed to enable authorities to focus their limited resources on that conduct most likely to have anticompetitive effects. In practice, this is done by applying several successive filters that separate potentially anticompetitive practices from ones that are likely innocuous.^[24] Depending on this initial classification, practices are then submitted to varying levels of scrutiny, which may range from per se prohibitions to presumptive legality.^[25]

Of the thousands of M&A transactions each year, only a few must be notified to antitrust authorities, and fewer still are subject to in-depth reviews.^[26] For instance, in both the United States and the European Union, only deals that meet certain transaction values and/or revenue thresholds require merger notifications.^[27] Accordingly, U.S. antitrust authorities receive somewhere in the vicinity of 2,000 merger filings per year, while the European Commission usually receives a few hundred.^[28] Typically, less than 5% of these mergers are ultimately subjected to in-depth reviews.^[29] These cases are selected by applying yet another set of filters that include: looking at the relationship between the merging firms (horizontal, vertical, conglomerate); calculating market shares and concentration ratios; and checking whether transactions fall within several recognized theories of harm.^[30]

Similar filtering mechanisms apply to other forms of conduct. Incumbent firms routinely decide to enter adjacent markets, for instance, or to adopt strategies that might incidentally reduce competition in markets where they are already present. As with mergers, authorities and courts apply a series of filters/presumptions to home in on those practices most likely to cause anticompetitive harm.^[31] Firms with low market shares are deemed less likely to possess market power (and thus, less likely to harm competition); vertical agreements are widely seen as being less problematic than horizontal ones; and vertical integration is widely regarded as procompetitive, absent other accompanying factors.^[32]

This system is certainly not perfect; filtering cases in this manner inevitably lets some anticompetitive practices fall through the cracks. Indeed, the error-cost framework is premised on the recognition of this eventuality. Nevertheless, the strengths of this paradigm arguably outweigh its weaknesses. “If presumptions let some socially undesirable practices escape, the cost is bearable. . . . One cannot have the savings of decision by rule without accepting the costs of mistakes.”^[33]

In most jurisdictions around the world, today’s competition merger-control apparatus is administrable,^[34] somewhat predictable,^[35] and—in the case of merger enforcement—it ensures that deals are reviewed in a relatively timely manner.^[36]

The contours of this system have profound ramifications for substantive antitrust policy. Potential reforms need to account for the tradeoffs inherent to this vision of antitrust enforcement: between false positives and false negatives, between timeliness and thoroughness, and so on. Accordingly, the relevant policy question is not whether existing provisions allow certain categories of potentially harmful conduct to go unchallenged. Instead, policymakers should ask whether there is a better set of filters and heuristics that would enable authorities and courts to prevent previously unchallenged anticompetitive conduct without overburdening the system or disproportionately increasing false positives. In short, antitrust enforcers must avoid the so-called “nirvana fallacy” of believing that all errors can be eliminated, and existing policies should thus always be weighed against alternative institutional arrangements (as opposed to merely identifying instances where they lead to false negatives).^[37]

B.      Calls for a Reform of Merger-Enforcement Rules and Thresholds

Against this backdrop, a growing body of economic literature has identified potential inadequacies in both the U.S. and EU merger-control regimes, as well as the antitrust rules that govern the business practices of digital platforms (notably, vertical integration and tying).^[38] These critiques focus on ways in which incumbents might prevent nascent or potential rivals from introducing innovative new products and services that could disrupt their existing businesses. In short, this recent economic literature purports to show how incumbents might use their dominant market positions to reduce innovation.

For instance, recent empirical research purports to show that mergers of pharmaceutical companies with overlapping R&D pipelines result in higher project-termination rates, thus reducing innovation and, ultimately, price competition. These are referred to as “killer acquisitions.”^[39] Others have argued that killer acquisitions also occur in the tech sector, although the empirical evidence offered to support this second claim is much weaker. In large part, this is because it does not differentiate between legitimate, efficient discontinuations of acquired products (such as the product being unsuccessful on the market, or the acquisition being done to hire the staff of the acquired firm) and the elimination of potential competitors.^[40] Acquisitions of nascent and potential competitors undertaken with the intention of reducing competition have also been described as “killer acquisitions,” even if they do not involve their products being discontinued.^[41]

Along similar lines, it is sometimes argued that large tech firms create so-called “kill zones” around their core businesses.^[42] Similarly, some scholars assert that incumbent digital platforms might seek to foreclose rivals in adjacent markets by “copying” their products, or by using proprietary datasets that tilt the scales in their favor.^[43]

All of these practices are said to harm innovation by deterring the incentives of competitors to invest in innovations that compete with incumbents. And the overarching theme of the above research is that existing antitrust doctrine is ill-equipped to handle these practices—or, at the very least, that antitrust law should be enforced more vigorously in these settings.

But while the above research identifies important and potentially harmful conduct that cannot be dismissed out of hand, it is important to recognize its inherent limitations when it comes to informing normative policy decisions. Indeed, there is a vast difference between identifying categories of conduct that sometimes harm consumers, on the one hand, and being able to isolate individual instances of anticompetitive behavior, on the other (and even then, it is important to distinguish conduct that harms consumers overall from conduct that merely harms certain parameters of competition while improving others. In other words, antitrust law should prohibit conduct when the category it belongs to is generally harmful to consumers and/or when harmful occurrences of that conduct can readily be distinguished^[44]).

The above is merely a restatement of the error-cost framework, which highlights that the existence of false negatives is not a sufficient condition for increased intervention. The fact—if it can be proved—that there were some false negatives does not imply that there has been underenforcement with respect to the optimal level of enforcement. In other words, in the digital space, the argument can be made that an optimal merger policy on average leads to ex-post “underenforcement.” Moreover, even if the level of enforcement has been lower than optimal, one must be careful not to swing too far in the opposite direction, especially in high-tech industries. The chilling effect on innovation could be significant.^[45] Instead, any change to the standards of government intervention that seeks to prevent more of these false negatives, with all the accompany tradeoffs and risks inherent to this enterprise, must ultimately increases social welfare overall.

Take the example of Google. It has acquired at least 270 companies over the last two decades.^[46] It has been argued that some of these—such as Google’s acquisitions of YouTube, Waze, or DoubleClick—may have been anticompetitive. The real test for regulators, however, is whether they could reliably identify which of Google’s 270 acquisitions are actually anticompetitive and do so under a decision rule that causes less harm to consumers from false positives caused by the current (alleged) false negatives. If the anticompetitive mergers are such a tiny percentage of total mergers, and if identifying them a priori is difficult, then a precautionary-principle strategy that results in many false positives would likely not merit the benefits from blocking one or two anticompetitive mergers.

Indeed, but for Google and Facebook’s investments in YouTube and Instagram (to cite but two examples), it is far from clear that a mere “video-hosting service” or “photo-sharing app” would have grown into the robust competitor that advocates assume. Apart from the potential synergies arising from the combination of these products with the acquiring companies’ other products (for example, YouTube’s search and recommendation engines being developed by Google, the world’s leading internet-search company, or Instagram’s ad platform being integrated with Facebook’s), corporate control by the acquiring company may lead to these firms being better managed. This concept of M&A as creating a “market for corporate control” adds an important new dimension to the understanding of the tradeoffs involved.^[47]

These anticompetitive theories of harm can thus be separated into three broad categories: (1) large incumbents have become so dominant in their primary markets that venture capitalists decline to fund startups that compete head-on, reducing potential competition; (2) these incumbents acquire potential competitors or non-competitor startups so as to reduce the competition along several dimensions, and (3) that incumbents purchase competitors to shut down their overlapping innovation pipelines (i.e., killer acquisitions).

III.    Concluding Remarks

With this in mind, applying the error-cost framework should lead policymakers to carefully consider the following questions when evaluating the merits and policy implications of economic research in this space:

1. Do the papers advancing these theories identify categories of conduct that, on average, harm consumer welfare?
2. If not, do the papers identify additional factors that would enable authorities to infer the existence of anticompetitive effects in individual cases?
3. If so, would it be feasible for authorities to add these factors to their analysis (in terms of time and resources)?
4. Finally, would prohibiting these practices at an individual or category level prevent efficiencies that would otherwise outweigh these anticompetitive harms? And could these efficiencies be analyzed on a case-by-case basis?

In addition to these error-cost-related questions, it is also necessary to question whether the results of these studies are relevant outside of the specific markets that they examine, and whether they give sufficient weight to countervailing procompetitive justifications.

All of this has profound ramifications for amendments to India’s competition law. Lowering merger-filing thresholds may be counterproductive if it means fewer enforcement resources are devoted to other, more important cases. To make matters worse, heightened merger-control rules may deter firms from merging in the first place. This could have dramatic consequences for an economy like India’s, which depends on startup activity to remain on its current growth path. In short, we recommend that Indian policymakers carefully consider whether the possibility of catching an additional handful of anticompetitive mergers is worth the significant costs that would be incurred by the Indian economy.

 

 

[1] The Competition Act (2002), as modified by the 2023 Amendment, Section 5 (d).

[2] See, e.g., Jonathan B Baker, Recent Developments in Economics That Challenge Chicago School Views, 58 Antitrust L.J. 655 (1989) (“Over the past fifteen years, the courts and enforcement agencies have created Robert Bork’s antitrust paradise. Antitrust has adopted the Chicago School’s efficiency analysis and the Chicago School’s conclusions about the effects of business practices.”). Note that, in many ways, the Chicago and late-Harvard views are somewhat similar when it comes to mergers—both schools of thought might thus have influenced this loosening of merger policy. See, e.g., Richard A Posner, The Chicago School of Antitrust Analysis, U. Penn. L. Rev. 937 (1979) (“The change in thinking that has been brought about by the Chicago school is nowhere more evident than in the area of vertical integration. Kaysen and Turner, writing in 1959, advocated for- bidding any vertical merger in which the acquiring firm had twenty percent or more of its market. Areeda and Turner, writing in 1978, express very little concern with anticompetitive effects from vertical integration. In fact, as between a rule of per se illegality for vertical integration by monopolists and a rule of per se legality, their preference is for the latter.”).

[3] See, e.g., Germán Gutiérrez & Thomas Philippon, Declining Competition and Investment in the U.S., NBER Working Paper 1 (2017) (“The U.S. business sector has under-invested relative to Tobin’s Q since the early 2000’s. We argue that declining competition is partly responsible for this phenomenon.”). Contra, Esteban Rossi-Hansberg, Pierre-Daniel Sarte & Nicholas Trachter, Diverging trends in national and local concentration, 35 NBER Macroeconomics Annual 1 (2021) (“Using US NETS data, we present evidence that the positive trend observed in national product-market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment.”).

[4] See, e.g., José Azar, Ioana Marinescu, Marshall Steinbaum & Bledi Taska, Concentration in U.S. labor markets: Evidence From Online Vacancy Data, 66 Labour Economics 101886 (2020) (“These indicators suggest that employer concentration is a meaningful measure of employer power in labor markets, that there is a high degree of employer power in labor markets, and also that it varies widely across occupations and geography.”).

[5] See, e.g., Tim Wu, The Curse of Bigness: Antitrust in the New Gilded Age 9 (2018) (“We have managed to recreate both the economics and politics of a century ago—the first Gilded Age—and remain in grave danger of repeating more of the signature errors of the twentieth century. As that era has taught us, extreme economic concentration yields gross inequality and material suffering, feeding an appetite for nationalistic and extremist leadership. Yet, as if blind to the greatest lessons of the last century, we are going down the same path. If we learned one thing from the Gilded Age, it should have been this: The road to fascism and dictatorship is paved with failures of economic policy to serve the needs of the general public.”).

[6] Rohit Chopra, Statement of Commissioner Rohit Chopra, 85 Fed. Regis. 231, 77052 (2020) (“Adequate premerger reporting is a helpful tool used to halt anticompetitive transactions before too much damage is done. However, the usefulness of the HSR Act only goes so far. This is because many deals can quietly close without any notification and reporting, since only transactions above a certain size are reportable.”).

[7] See Collen Cunningham, Florian Ederer, & Song Ma, Killer Acquisitions, 129 J. Pol. Econ. 649 (2021); Sai Krishna Kamepalli, Raghuram Rajan & Luigi Zingales, Kill Zone, Nat’l Bureau of Econ. Research, Working Paper No. 27146 (2020); Digital Competition Expert Panel, Unlocking Digital Competition (2019), available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf; Stigler Center for the Study of the Economy and the State, Stigler Committee on Digital Platforms (2019), available at https://www.publicknowledge.org/wp-content/uploads/2019/09/Stigler-Committee-on-Digital-Platforms-Final-Report.pdf; Australian Competition & Consumer Commission, Digital Platforms Inquiry (2019), available at https://www.accc.gov.au/system/files/Digital%20platforms%20inquiry%20-%20final%20report.pdf. See also Jacques Cre?mer, Yves-Alexandre De Montjoye, Heike Schweitzer, Competition Policy For The Digital Era Final Report (2019), available at https://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf [hereinafter “Crémer Report”].

[8] Cristina Caffarra, Gregory S. Crawford, & Tommaso Valletti, “How Tech Rolls”: Potential Competition and “Reverse” Killer Acquisitions, 2 Antitrust Chron. 1, 1 (2020).

[9] As far as jurisdictional thresholds are concerned, see, e.g., Crémer Report, supra note 7, at 10 (“Many of these acquisitions may escape the Commission’s jurisdiction because they take place when the start-ups do not yet generate sufficient turnover to meet the thresholds set out in the EUMR. This is because many digital startups attempt first to build a successful product and attract a large user base while sacrificing short-term profits; therefore, the competitive potential of such start-ups may not be reflected in their turnover. To fill this gap, some Member States have introduced alternative thresholds based on the value of the transaction, but their practical effects still have to be verified.”). As far as inverting the burden of proof is concerned, see, e.g., Crémer Report, supra note 7, at 11 (“The test proposed here would imply a heightened degree of control of acquisitions of small start-ups by dominant platforms and/or ecosystems, to be analysed as a possible strategy against partial user defection from the ecosystem. Where an acquisition is plausibly part of such a strategy, the notifying parties should bear the burden of showing that the adverse effects on competition are offset by merger-specific efficiencies.”).

[10] As far as jurisdictional thresholds are concerned, see, e.g., Crémer Report, supra note 7, at 10 (“Many of these acquisitions may escape the Commission’s jurisdiction because they take place when the start-ups do not yet generate sufficient turnover to meet the thresholds set out in the EUMR. This is because many digital startups attempt first to build a successful product and attract a large user base while sacrificing short-term profits; therefore, the competitive potential of such start-ups may not be reflected in their turnover. To fill this gap, some Member States have introduced alternative thresholds based on the value of the transaction, but their practical effects still have to be verified.”). As far as inverting the burden of proof is concerned, see, e.g., Crémer Report, supra note 7, at 11 (“The test proposed here would imply a heightened degree of control of acquisitions of small start-ups by dominant platforms and/or ecosystems, to be analysed as a possible strategy against partial user defection from the ecosystem. Where an acquisition is plausibly part of such a strategy, the notifying parties should bear the burden of showing that the adverse effects on competition are offset by merger-specific efficiencies.”).

[11] See FTC Press Release, FTC Sues to Block Procter & Gamble’s Acquisition of Billie, Inc. (Dec. 8, 2020), https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-block-procter-gambles-acquisitionbillie-inc; DOJ Press Release, Justice Department Sues to Block Visa’s Proposed Acquisition of Plaid (Nov. 5, 2020), https://www.justice.gov/opa/pr/justice-department-sues-block-visas-proposedacquisition-plaid; FTC Press Release, FTC Files Suit to Block Edgewell Personal Care Company’s Acquisition of Harry’s, Inc. (Feb. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/02/ftcfiles-suit-block-edgewell-personal-care-companys-acquisition; FTC Press Release, FTC Challenges Illumina’s Proposed Acquisition of PacBio (Dec. 17, 2019), https://www.ftc.gov/newsevents/pressreleases/2019/12/ftc-challenges-illuminas-proposed-acquisition-pacbio; DOJ Press Release, Justice Department Sues to Block Sabre’s Acquisition of Farelogix (Aug. 20, 2019), https://www.justice.gov/opa/pr/justice-department-sues-block-sabres-acquisition-farelogix.

[12] See FTC Press Release, FTC Sues to Block Procter & Gamble’s Acquisition of Billie, Inc. (Dec. 8, 2020), https://www.ftc.gov/news-events/press-releases/2020/12/ftc-sues-block-procter-gambles-acquisitionbillie-inc; DOJ Press Release, Justice Department Sues to Block Visa’s Proposed Acquisition of Plaid (Nov. 5, 2020), https://www.justice.gov/opa/pr/justice-department-sues-block-visas-proposedacquisition-plaid; FTC Press Release, FTC Files Suit to Block Edgewell Personal Care Company’s Acquisition of Harry’s, Inc. (Feb. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/02/ftcfiles-suit-block-edgewell-personal-care-companys-acquisition; FTC Press Release, FTC Challenges Illumina’s Proposed Acquisition of PacBio (Dec. 17, 2019), https://www.ftc.gov/newsevents/pressreleases/2019/12/ftc-challenges-illuminas-proposed-acquisition-pacbio; DOJ Press Release, Justice Department Sues to Block Sabre’s Acquisition of Farelogix (Aug. 20, 2019), https://www.justice.gov/opa/pr/justice-department-sues-block-sabres-acquisition-farelogix.

[13] See, e.g., Prepared Remarks of Commissioner Noah Joshua Phillips, “Reasonably Capable? Applying Section 2 to Acquisitions of Nascent Competitors,” Antitrust in the Technology Sector: Policy Perspectives and Insights From the Enforcers Conference (Apr. 29, 2021), available at https://www.ftc.gov/system/files/documents/public_statements/1589524/reasonably_capable_-_acquisitions_of_nascent_competitors_4-29-2021_final_for_posting.pdf (“Some would-be reformers view M&A as fundamentally predatory and wish to “level the playing” field for smaller, less competitive, or more sympathetic businesses by throwing as much sand in the gears as possible. But their Harrison Bergeron vision of competition, handicapping successful businesses, will not so much level the field as tilt the scales dramatically in favor of the government, handing tremendous power to regulators, sapping American competitiveness, and hitting Americans in their pocketbooks.”).

[14] Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1 (1984).

[15] For vertical mergers, the welfare-enhancing effects are well-established. See, e.g., Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. Econ. Lit. 677 (2007) (“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.”). See also, Global Antitrust Institute, Comment Letter on Federal Trade Commission’s Hearings on Competition and Consumer Protection in the 21st Century, Vertical Mergers 8–9, Geo. Mason Law & Econ. Research Paper No. 18-27 (2018), https://ssrn.com/abstract=3245940 (“In sum, these papers from 2009-2018 continue to support the conclusions from Lafontaine & Slade (2007) and Cooper et al. (2005) that consumers mostly benefit from vertical integration. While vertical integration can certainly foreclose rivals in theory, there is only limited empirical evidence supporting that finding in real markets. The results continue to suggest that the modern antitrust approach to vertical mergers 9 should reflect the empirical reality that vertical relationships are generally procompetitive.”). Along similar lines, empirical research casts doubt on the notion that antitrust merger enforcement (in marginal cases) raises consumer welfare. The effects of horizontal mergers are, empirically, less well-documented. See, e.g., Robert W Crandall & Clifford Winston, Does Antitrust Policy Improve Consumer Welfare? Assessing the Evidence, 17 J. Econ. Persp. 20 (2003) (“We can only conclude that efforts by antitrust authorities to block particular mergers or affect a merger’s outcome by allowing it only if certain conditions are met under a consent decree have not been found to increase consumer welfare in any systematic way, and in some instances the intervention may even have reduced consumer welfare.”). While there is some evidence that horizontal mergers can reduce consumer welfare, at least in the short run, see, for example, Gregory J. Werden, Andrew S. Joskow, & Richard L. Johnson, The Effects of Mergers on Price and Output: Two Case Studies from the Airline Industry, 12 Mgmt. Decis. Econ. 341 (1991), the long-run effects appear to be strongly positive. See, e.g., Dario Focarelli & Fabio Panetta, Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits, 93 Am. Econ. Rev. 1152, 1152 (2003) (“We 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.”). See also generally Michael C. Jensen, Takeovers: Their Causes and Consequences, 2 J. Econ. Persp. 21 (1988). Some related literature similarly finds that horizontal merger enforcement has harmed consumers. See B. Espen Eckbo & Peggy Wier, Antimerger Policy Under the Hart-Scott-Rodino Act: A Reexamination of the Market Power Hypothesis, 28 J.L. & Econ. 119, 121 (1985) (“In sum, our results do not support the contention that enforcement of Section 7 has served the public interest. While it is possible that the government’s merger policy has deterred some anticompetitive mergers, the results indicate that it has also protected rival producers from facing increased competition due to efficient mergers.”); B. Espen Eckbo, Mergers and the Value of Antitrust Deterrence, 47 J. Finance 1005, 1027-28 (1992) (rejecting “the market concentration doctrine on samples of both U.S. and Canadian mergers. By implication, the results also reject the effective deterrence hypothesis. The evidence is, however, consistent with the alternative hypothesis that the horizontal mergers in either of the two countries were expected to generate productive efficiencies”). Regarding the effect of mergers on investment, see, e.g., Gordon M. Phillips & Alexei Zhdanov, Venture Capital Investments and Merger and Acquisition Activity Around the World, NBER Working Paper No. w24082 (Nov. 2017), available at https://ssrn.com/abstract=3082265 (“We examine the relation between venture capital (VC) investments and mergers and acquisitions (M&A) activity around the world. We find evidence of a strong positive association between VC investments and lagged M&A activity, consistent with the hypothesis that an active M&A market provides viable exit opportunities for VC companies and therefore incentivizes them to engage in more deals.”). And increased M&A activity in the pharmaceutical sector has not led to decreases in product approvals; rather, quite the opposite has happened. See, e.g., Barak Richman, Will Mitchell, Elena Vidal, & Kevin Schulman, Pharmaceutical M&A Activity: Effects on Prices, Innovation, and Competition, 48 Loyola U. Chi. L.J. 799 (2017) (“Our review of data measuring pharmaceutical innovation, however, tells a different story. First, even as merger activity in the United States increased over the past ten years, there has been a steady upward trend of FDA approvals of new molecular entities (“NMEs”) and new biological products (“BLAs”). Hence, the industry has been highly successful in bringing new products to the market.”).

[16] Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).

[17] See Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J.L. Econ. 1, 22 (1969) (“The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing “imperfect” institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”).

[18] Cunningham et al., supra note 7, at 692 (“Given these assumptions and estimates, what would the fraction ν of pure killer acquisitions among transactions with overlap have to be to result in the lower development of acquisitions with overlap (13.4%)? Specifically, we solve the equation 13.4% = ν × 0 + (1 − ν) × 17.5% for ν which yields ν = 23.4%. Therefore, we estimate that 5.3% (= ν × 22.7%) of all acquisitions, or about 46 (= 5.3% × 856) acquisitions every year, are killer acquisitions. If instead we assume the non-killer acquisitions to have the same development likelihood as non-acquired projects (19.9%), we estimate that 7.4% of acquisitions, or 63 per year, are killer acquisitions.”).

[19] See Value of Mergers and Acquisitions (M&A) Worldwide from 1985 to 2020, Statista (Jan. 15, 2021), https://www.statista.com/statistics/267369/volume-of-mergers-and-acquisitions-worldwide. See Gross Domestic Spending on R&D, OECD (last visited Apr. 29, 2021) https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm.

[20] See supra note 15.

[21] Running the antitrust system is itself a cost to society.

[22] See, e.g., Olivier E. Williamson, Economies as an Antitrust Defense: The Welfare Tradeoffs, 58 Am. Econ. Rev. 18 (1968). See also, Easterbrook, supra note 14; Henry G. Manne, supra note 16; William M Landes & Richard A Posner, Market Power in Antitrust Cases, 94 Harv. L. Rev. 937 (1980).

[23] Easterbrook, id., at 14.

[24] See Easterbrook, id., at 17 (“The task, then, is to create simple rules that will filter the category of probably beneficial practices out of the legal system, leaving to assessment under the Rule of Reason only those with significant risks of competitive injury.”).

[25] Id. at 15 (“They should adopt some simple presumptions that structure antitrust inquiry. Strong presumptions would guide businesses in planning their affairs by making it possible for counsel to state that some things do not create risks of liability. They would reduce the costs of litigation by designating as dispositive particular topics capable of resolution.”).

[26] See Number of Merger and Acquisition Transactions Worldwide from 1985 to 2021, Statista (May 14, 2021), https://www.statista.com/statistics/267368/number-of-mergers-and-acquisitions-worldwide-since-2005.

[27] See 15 U.S.C. §18a (1976). See also, FTC Premerger Notification Office Staff, HSR Thresholds Adjustments and Reportability for 2020, FTC Competition Matters (Jan. 31, 2020), https://www.ftc.gov/news-events/blogs/competition-matters/2020/01/hsr-threshold-adjustments-reportability-2020. See also Council Regulation 139/2004, 2004 O.J. (L 24) 1, 22 (EC).

[28] See Federal Trade Comm’n & U.S. Dep’t of Justice, Hart-Scott-Rodino Annual Report Fiscal Year 2019 (2020), available at https://www.ftc.gov/system/files/documents/reports/federal-trade-commission-bureau-competition-department-justice-antitrust-division-hart-scott-rodino/p110014hsrannualreportfy2019_0.pdf. See also, European Commission, Merger Statistics, 21 September 1990 to 31 December 2020 (2021), available at https://ec.europa.eu/competition/mergers/statistics.pdf.

[29] See FTC and European Commission, id.

[30] See U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines (2010), U.S. Dep’t of Justice & Fed. Trade Comm’n, Vertical Merger Guidelines (2020). See also Commission Guidelines on the Assessment of Non-Horizontal Mergers Under the Council Regulation on the Control of Concentrations Between Undertakings, 2008 O.J. (C 265) 6, 25.

[31] See Federal Trade Commission & U.S. Department of Justice, Antitrust Guidelines for the Licensing of Intellectual Property 15 (Jan. 12, 2017) (“The existence of a horizontal relationship between a licensor and its licensees does not, in itself, indicate that the arrangement is anticompetitive. Identification of such relationships is merely an aid in determining whether there may be anticompetitive effects arising from a licensing arrangement.”). See also European Commission, Communication from the Commission—Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, O.J. C. 45, 7–20 (Feb. 24, 2009).

[32] See Antitrust Guidelines for the Licensing of Intellectual Property, id. See also, Commission Guidelines on Vertical Restraints, 2010 O.J. (C 130) 1, 46, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52010XC0519(04)&from=EN.

[33] Easterbrook, supra note 14, at 15.

[34] It requires only limited government resources to function, compared to, for example, a system that reviews every merger in detail.

[35] Companies can self-assess whether their mergers are likely to be struck down by authorities and adapt their investment decisions accordingly.

[36] Even in-depth merger investigations are typically concluded within months, rather than years.

[37] See Demsetz, supra note 17, at 1 (“The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing “imperfect” institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”).

[38] See Cunningham et al., supra note 7; Zingales et al., supra note 7; Kevin A Bryan & Erik Hovenkamp, Antitrust Limits on Startup Acquisitions, 56 Rev. Indus. Org. 615 (2020); Mark A. Lemley & Andrew McCreary, Exit Strategy, Stanford Law and Economics Working Paper No. 542 (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3506919.

[39] See Cunningham et al., id. at 650 (“We argue that an incumbent firm may acquire an innovative target and terminate the development of the target’s innovations to preempt future competition. We call such acquisitions ‘killer acquisitions,’ as they eliminate potentially promising, yet likely competing, innovation.”).

[40] See, e.g., Axel Gautier & Joe Lamesch, Mergers in the Digital Economy, Info. Econ. & Pol’y (2000) (“There are three reasons to discontinue a product post-acquisition: the product is not as successful as expected, the acquisition was not motivated by the product itself but by the target’s assets or R&D effort, or by the elimination of a potential competitive threat. While our data does not enable us to screen between these explanations, the present analysis shows that most of the startups are killed in their infancy.”).

[41] John M. Yun, Potential Competition, Nascent Competitors, and Killer Acquisitions, in GAI Report on the Digital Economy (Ginsburg & Wright, eds. 2000).

[42] See Zingales et al. supra note 7.

[43] See, e.g., Kevin Caves & Hal Singer, When the Econometrician Shrugged: Identifying and Plugging Gaps in the Consumer-Welfare Standard, 26 Geo. Mason L. Rev. 396 (2018) (“Or imagine the platform was appropriating or “cloning” app functionality into its basic service. The only potential harm in this instance would be that independent edge providers would be encouraged to exit or discouraged from entering in future periods. In theory, edge providers might be discouraged to compete in the app space given what they perceive to be a slanted playing field.”).

[44] See, e.g., Eric Fruits, Justin (Gus) Hurwitz, Geoffrey A. Manne, Julian Morris, & Alec Stapp, Static and Dynamic Effects of Mergers: A Review of the Empirical Evidence in the Wireless Telecommunications Industry, OECD Directorate for Financial and Enterprise Affairs Competition Committee, Global Forum on Competition, DAF/COMP/GF(2019)13 (Dec. 6, 2019) at ¶ 61, available at https://one.oecd.org/document/DAF/COMP/GF(2019)13/en/pdf (“Studies that do not consider these [non-price] effects are incomplete for purposes of evaluating the mergers’ consumer welfare effects, and [are] all-too-easily used by advocates to misleadingly predict negative consumer outcomes. This is not necessarily a criticism of the studies themselves, which generally do not make comprehensive policy conclusions. The reality is that it is exceptionally difficult to comprehensively study even price effects, such that a well-conducted study of price effects alone is a valuable contribution to the literature. Nevertheless, in the context of evaluating prospective transactions, the results of such studies must be discounted to account for their exclusion of non-price effects.”).

[45] Luís Cabral, Merger Policy in Digital Industries, CEPR Discussion Paper No. DP14785 (May 2020) at 12, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3612854.

[46] See Carl Shapiro, Antitrust in the Time of Populism, 61 Int’l J. Indus. Org. 714 (2018).

[47] See Henry G. Manne, supra note 16.