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Written Testimonies & Filings I. Introduction and Summary Chairman, Ranking Member, and Members of the Subcommittee, thank you for the opportunity to submit this statement. This hearing raises two . . .
Chairman, Ranking Member, and Members of the Subcommittee, thank you for the opportunity to submit this statement.
This hearing raises two closely related questions: How should policymakers understand competition in the airline industry, and how do government regulations either promote or impede that competition? The answer to both points in the same direction. The current regulatory framework creates both antitrust pressure and regulation-induced scarcity. It makes it difficult for large airlines to earn sustainable returns in a low-margin business and even more difficult for smaller, budget-focused carriers to survive.
Too often, policymakers rely on static snapshots of market structure to identify an ideal number of competitors without fully accounting for the economic realities those firms face. At the same time, government policies place regulators in the role of allocating scarce inputs, including takeoff and landing rights, gate access, airspace capacity, and access to capital. Those inputs are critical in an industry characterized by high fixed costs. When government controls access to them, it can systematically disadvantage smaller competitors and impede the growth of new entrants.
As a high-fixed-cost, low-margin network industry, commercial aviation will not necessarily support a large number of viable competitors.[1] Economies of scale and scope naturally favor firms that can spread substantial fixed costs across extensive networks.[2] Today, the four largest U.S. airlines account for roughly three-quarters of domestic capacity, while hub dominance, frequent-flyer programs, and corporate-contracting relationships provide additional advantages to incumbent carriers.[3]
Recognizing concentration, however, is not the same as identifying competitive harm or crafting remedies tailored to that harm. Recent events—most notably the collapse of Spirit Airlines—underscore the fragility of smaller competitors and highlight a broader point: the most significant constraints on airline competition are overwhelmingly governmental in origin. As a result, the most valuable reforms available to Congress involve removing or disciplining those constraints, rather than layering additional interventions on top of them.
This testimony proceeds as follows. Part II places today’s debate in the historical context of airline deregulation and explains the importance of matching regulatory tools to genuine market problems. Part III examines the JetBlue-Spirit merger litigation and what Spirit’s subsequent liquidation reveals about the limits of contemporary merger doctrine. Part IV addresses airport slots, the clearest example of a government-rationed input that entrenches incumbents. Part V discusses cabotage and foreign-ownership restrictions. Part VI examines how environmental-review requirements constrain airport and airspace expansion, contributing to the scarcity often used to justify slot controls. Part VII explains how an expanding body of consumer-protection mandates erodes the operational flexibility on which a high-fixed-cost, low-margin industry depends, and why those burdens fall most heavily on the low-cost carriers that discipline fares. Part VIII offers recommendations.
Any assessment of airline competition should begin with the Airline Deregulation Act of 1978. It remains the closest thing economics has to a controlled experiment in this industry. For roughly four decades before deregulation, the Civil Aeronautics Board regulated fares and controlled entry through cost-of-service ratemaking and route licensing—tools developed for natural monopolies.[4] Commercial aviation did not exhibit those characteristics. Entry barriers were relatively low, and nothing inherent to the industry prevented multiple carriers from serving routes profitably.
Stephen Breyer, then a judge and former special counsel to the Senate Judiciary Committee during the deregulation debates, described airline regulation as the paradigmatic case of regulatory “mismatch”—the application of a regulatory tool to a problem it was not designed to solve.[5] Regulators justified the regime as necessary to prevent “excessive” or “destructive” competition, a rationale Breyer famously characterized as an “empty box” that collapsed under scrutiny.[6]
That justification also sat uneasily alongside federal competition policy. As the Supreme Court has repeatedly recognized, the federal antitrust laws embody the nation’s commitment to free enterprise and economic competition.[7] By suppressing price competition, regulation redirected rivalry into costly non-price dimensions. Airlines competed through the “capacity wars” and “lounge wars” of the regulated era, flying half-empty aircraft and expanding amenities while charging fares above competitive levels. Subsequent research found that deregulation generated billions of dollars in annual consumer savings through lower fares and expanded service.[8]
Three lessons from that experience bear directly on the issues before this Subcommittee.
First, policymakers should match regulatory interventions to demonstrated market failures or other identifiable consumer harms. Regulation is most defensible when it addresses a specific problem that markets cannot adequately solve on their own.
Second, when intervention is warranted, policymakers should consider less-restrictive alternatives before resorting to prescriptive regulation. Those alternatives include laws of general application, such as the federal antitrust laws, which can address competitive concerns without imposing detailed operational mandates.
Third, regulation often outlives the conditions that originally justified it. As economists have long observed, regulatory regimes frequently create concentrated benefits for organized interests while dispersing costs across consumers.[9] The beneficiaries therefore have strong incentives to preserve existing rules even after their rationale has disappeared. For that reason, policymakers should regularly review legacy regulations to determine whether they remain fit for purpose and whether they continue to achieve their objectives efficiently.
The history of regulation within the deregulated airline industry illustrates this dynamic. In 1984, after concerns arose about “display bias” in airline-owned computer reservation systems, the Department of Transportation (DOT) adopted prescriptive regulations governing those systems. The rules failed to achieve their principal objective. No new reservation system entered the market, and innovation slowed under mandatory oversight. The regulations ultimately became obsolete and were repealed in 2004, after competition emerged from an unexpected source: the open internet.[10]
The broader lesson extends well beyond aviation. Prescriptive rules that entrench existing market structures often prove poorly suited to technological and competitive change. Markets evolve, business models adapt, and new forms of competition emerge. Regulatory frameworks that assume current conditions will persist indefinitely rarely age well.
No recent episode better illustrates the gap between merger-enforcement theory and market reality than the JetBlue-Spirit litigation.
The chronology is straightforward. Spirit agreed to merge with Frontier in February 2022. JetBlue subsequently made an unsolicited offer and, after increasing its bid, signed a merger agreement with Spirit in July 2022.[11] The U.S. Department of Justice (DOJ) sued to block the transaction in March 2023, and on Jan. 16, 2024, Judge William G. Young permanently enjoined the merger.[12] The parties terminated the agreement two months later.[13]
Spirit then entered Chapter 11 bankruptcy in November 2024 and emerged in March 2025. It filed for bankruptcy a second time in August 2025 and ceased operations entirely on May 2, 2026. A 34-year-old airline disappeared, taking with it the very low-fare competitor that the enforcement action sought to preserve.[14] The government won the case, but consumers lost the carrier. So, too, disappeared the “Spirit Effect”—the tendency of Spirit’s presence to discipline fares across a market.[15]
It would be too simplistic, and almost certainly incorrect, to conclude that the DOJ “caused” Spirit’s collapse. The airline’s failure had multiple causes. A Pratt & Whitney engine-inspection crisis grounded a substantial share of its fleet.[16] Legacy carriers increasingly competed for Spirit’s customers through basic-economy offerings.[17] Fuel costs rose.[18] Spirit’s effort to reposition itself as a more premium carrier failed to gain traction.[19] The company accumulated roughly $2 billion in losses after 2020.[20]
The lesson is not that the merger necessarily should have been approved. Rather, it is that the doctrinal framework applied to the case was too static to evaluate a visibly fragile firm operating in a capital-intensive network industry.
Two features of current merger doctrine deserve the Subcommittee’s attention.
The first is the failing-firm defense. As traditionally formulated under Citizen Publishing Co. v. United States, the doctrine asks a binary question: Is the firm on the verge of failure, with no alternative purchaser available?[21] If the answer is no, courts often proceed as though the firm will remain a vigorous competitor indefinitely, regardless of contrary evidence.
That all-or-nothing framework fits poorly in industries characterized by high fixed costs and vulnerability to large external shocks. In such industries, the relevant competitive question is not whether a firm has already crossed the threshold into failure, but the likelihood that it will remain a meaningful competitive constraint over the next 5 to 10 years.
Judge Young acknowledged Spirit’s financial distress. Having concluded that the failing-firm defense did not formally apply, however, the court effectively treated Spirit as a durable competitive constraint.[22] That assumption was questionable at the time and was later contradicted by events.[23] Importantly, this conclusion does not depend on hindsight. The trial record showed projected losses of $467 million in 2023, following more than $1 billion in prior losses, and no annual profit since 2019.[24] Within days of the decision, industry analysts warned that liquidation had become a more likely outcome than Spirit’s continued operation as a vigorous competitor.[25]
The second issue is the treatment of out-of-market efficiencies. The court expressly recognized that a combined JetBlue-Spirit carrier likely would have exerted stronger competitive pressure on the four largest airlines, benefiting a broader population of travelers than Spirit’s traditional ultra-low-cost customer base:
The Defendant Airlines have demonstrated that an expansion of all aspects of JetBlue’s business — including network, fleet, and loyalty program — would allow for more vigorous competition with the Big Four, which carry most passengers in the country … were JetBlue to become more relevant, it would immediately place more pressure on its greatest competitors, the Big Four. This pressure would benefit consumers [.][26]
Under the “in any market” approach associated with United States v. Philadelphia National Bank and United States v. Topco Associates,[27] however, localized harms to the most price-sensitive travelers on particular routes controlled the analysis, regardless of the magnitude of broader competitive benefits. Because each route constituted a separate market, the prospect of harm within any one of those markets outweighed gains elsewhere.[28]
The result was a merger that the court appeared to regard as beneficial on balance at the national level, but that it nevertheless blocked to preserve route-level competition that the market itself subsequently eliminated.
Empirical evidence from completed airline mergers is consistent with a more dynamic approach. In a retrospective study of five U.S. airline mergers, Jeffrey Prince and Daniel Simon found that merging carriers’ on-time performance improved over the long run, suggesting efficiency gains rather than quality degradation.[29] Their findings align with a broader body of structural and quasi-experimental research supporting a more dynamic approach to airline merger analysis.[30]
At the same time, the policy implications should not be overstated. When a properly grounded analysis identifies genuine anticompetitive harm, the antitrust laws can and should address it. Courts routinely evaluate allegations of anticompetitive conduct in the airline industry,[31] demonstrating that case-specific enforcement remains a viable tool for protecting competition.
The Spirit episode nonetheless highlights the need for a more dynamic merger framework. Rather than forcing courts to choose between the strict failing-firm defense and the assumption that a distressed carrier will remain an effective competitor indefinitely, merger analysis should incorporate a probability-weighted assessment of competitive durability. Courts should likewise give consistent weight to out-of-market efficiencies that benefit consumers, even when those benefits arise outside the narrow markets identified in litigation.
Such an approach would better reflect the realities of competition in a high-fixed-cost, low-margin network industry.
If the DOJ was correct to worry that concentration in the airline industry poses competitive concerns, some of the most durable barriers to reducing that concentration arise not from airline conduct, but from government restrictions on airport capacity.
At the nation’s most congested airports, the Federal Aviation Administration (FAA) allocates access through “slots”—reservations for individual takeoffs and landings.[32] The system traces its origins to the High Density Rule of 1969. Today, John F. Kennedy International Airport, LaGuardia Airport, and Ronald Reagan Washington National Airport remain formally slot-controlled, while the FAA manages scheduling at other major airports, including O’Hare, Newark, Los Angeles, and San Francisco.[33] Reagan National operates under an additional statutory perimeter rule layered atop a cap of roughly 67 operations per hour.[34]
In economic terms, slots function as property rights. Airlines lease them, use them as collateral, and buy and sell them in secondary markets. At London Heathrow Airport, a single slot pair has sold for tens of millions of dollars.[35] Yet in the United States, regulators originally distributed slots to incumbent carriers at no cost and continue to protect them through grandfather rights and minimum-use requirements.
The Government Accountability Office (GAO) highlighted the tension in this arrangement when it observed that the FAA’s own treatment of slots as property effectively suggests that the government has spent decades transferring potentially valuable federal assets without compensation.[36]
This system creates two significant barriers to competition.
First, it advantages incumbent airlines that already control the scarce combination of slots, gates, and operating positions needed to serve congested airports. Entry therefore depends not merely on a carrier’s willingness to add service, but on its ability to acquire access to assets that government policy has made artificially scarce.
Second, minimum-use—or “use-it-or-lose-it”—rules can encourage airlines to operate uneconomic “ghost flights” primarily to preserve their slot holdings. Those flights consume fuel, labor, and airport capacity without corresponding consumer benefits. They exist because airlines possess only conditional rights to use slots, rather than secure ownership interests.[37]
The competitive stakes are substantial. Research finds that low-fare entry reduces average fares by roughly 17% and increases flight frequencies by roughly 30%.[38] Other studies estimate that entry by low-cost carriers reduces fares by approximately 38% to 53%. In many cases, more than half of the fare reduction occurs before the entrant begins service, as the mere threat of entry disciplines incumbent carriers.[39]
Two facts demonstrate that the current allocation system reflects policy choices, not technological necessity.
First, when the FAA approved a major slot transaction between Delta Air Lines and US Airways in 2011, it required the parties to divest two dozen slots. The agency then auctioned those slots to new entrants. Low-fare carriers collectively bid roughly $90 million, demonstrating both the economic value of the slots and the demand from challengers seeking access to constrained airports.[40]
Second, in 2025, the FAA extended waivers of minimum-use requirements at Reagan National, John F. Kennedy, and LaGuardia through the summer of 2026. That decision confirms that the agency already treats slot-use requirements as a matter of administrative discretion.[41] If regulators can suspend those rules when circumstances warrant, they can also redesign them to facilitate entry through transparent and predictable criteria.
The more durable solution, as many transportation economists have argued, is to move away from administrative rationing altogether. Transparent slot markets, secondary trading, and congestion pricing would allocate scarce runway capacity through market mechanisms rather than regulatory discretion.[42] Such reforms would not eliminate airport scarcity, but they would make access to scarce capacity more contestable and reduce one of the most significant government-created barriers to airline competition.
Two additional legal regimes suppress competition before any merger occurs by limiting both who may compete and who may provide capital.
The first is the federal cabotage prohibition, which bars foreign airlines from transporting passengers or cargo for hire between two points within the United States.[43] As a result, some of the world’s most efficient low-cost carriers cannot serve domestic routes that airlines such as Spirit have abandoned, regardless of the benefits their entry might provide to consumers.
The second is the citizenship requirement for U.S. air carriers. Current law limits foreign investors to 25% of voting equity and 49% of total equity, while requiring U.S. citizens to retain actual control of the carrier, including the presidency and two-thirds of the board of directors.[44] Whatever their original justification, these restrictions operate today as a form of protectionism. They reduce both the pool of potential entrants and the capital available to recapitalize distressed airlines. In Spirit’s case, additional access to foreign capital might have supported restructuring rather than liquidation.
This is not a novel or fringe view. In 2003, the DOT proposed increasing the foreign voting-equity limit to 49%, concluding that greater access to capital would benefit consumers and strengthen the industry’s financial health.[45]
A further point deserves emphasis because it explains why domestic legislation alone cannot fully address the issue. These ownership restrictions operate through what scholars describe as a “double-bolted lock.”[46]
The first lock is domestic law: the statutory citizenship and control requirements. The second is international. The principle that an airline must be “substantially owned and effectively controlled” by nationals of its home country—the so-called nationality rule—appears not only in domestic statutes, but throughout the network of bilateral air-services agreements that governs international aviation.[47]
Those agreements generally permit each country to suspend or revoke a foreign carrier’s operating rights if the carrier is no longer substantially owned and effectively controlled by nationals of the country that designated it. The purpose is to prevent “treaty shopping,” whereby airlines seek to exploit favorable regulatory regimes while retaining access to international traffic rights.[48]
The result is a form of prisoner’s dilemma. A country that unilaterally liberalizes its domestic ownership rules risks having its airlines’ access to foreign markets restricted under existing bilateral agreements. For that reason, Congress should pursue ownership and cabotage liberalization on a reciprocal basis, paired with negotiated amendments to relevant air-services agreements, rather than assume that removing domestic restrictions alone will unlock additional competition and investment.
Liberalization in this area is one of the rare procompetitive reforms that requires removing a restriction rather than imposing a new one. The proposal also finds support in the economics of international aviation. Empirical research suggests that inefficiencies in airline pricing arise primarily from private information about passenger demand, rather than from an insufficient number of carriers. That finding points toward facilitating entry and investment, rather than further restricting the firms already operating in the market.[49]
At a minimum, Congress should direct a comprehensive study of phased ownership liberalization and reciprocal cabotage arrangements with trusted aviation partners.
The scarcity that makes slot rationing appear necessary is, at bottom, a scarcity of runway and airspace capacity. The speed and predictability of capacity expansion therefore matter for competition. New runways, terminals, and airspace redesigns that could relieve congestion typically must undergo review under the National Environmental Policy Act (NEPA). The cost, delay, and litigation risk associated with that process can discourage or postpone the very investments that would expand access for new entrants and reduce the need for administrative rationing. Too often, competition debates treat airport-capacity constraints as a fixed feature of the industry. In reality, many of those constraints reflect policy choices about how quickly new capacity can be approved and brought online.
Recent legal developments have created an opportunity for more durable reform. In Seven County Infrastructure Coalition v. Eagle County, the Supreme Court clarified that courts owe agencies substantial deference in defining the scope of environmental review. The Court further held that NEPA does not require agencies to analyze the effects of separate upstream or downstream projects.[50] Instead, NEPA requires agencies to prepare a “detailed” environmental impact statement, while leaving substantial discretion to agencies to determine which effects warrant analysis and how that analysis should proceed.[51]
The FAA subsequently revised its NEPA procedures through Order 1050.1G. The new framework emphasizes enforceable review deadlines, narrows the range of effects that require analysis, and expands categorical exclusions for certain airport-specific actions.[52]
Congress should build on these developments. Codifying firm review deadlines, expanding categorical exclusions for capacity-enhancing projects at slot-constrained airports, and limiting the period for judicial challenges would help ensure that capacity expansion can keep pace with demand. Put differently, the cure for congestion should not remain slower than the policies designed to manage congestion’s consequences.
A final category of regulation affects competition not by restricting entry, but by imposing recurring costs on carriers already operating in the market. To understand its competitive significance, one must begin with the economics of the airline business.
Airlines are capital-intensive enterprises characterized by high fixed and sunk costs, thin margins, and significant exposure to unexpected disruptions. In that environment, operational flexibility serves as a critical shock absorber. The ability to cancel, consolidate, re-bank schedules, swap aircraft and crews, and re-accommodate passengers allows carriers to respond to weather events, air-traffic-control constraints, mechanical failures, and other disruptions without exhausting their cash reserves.
Each regulatory mandate that converts a discretionary operational decision into a legal obligation reduces that flexibility. In economic terms, such mandates can transform manageable and variable risks into recurring fixed costs.[53] In an industry already burdened by substantial fixed costs, those additional obligations matter.
This point is neither novel nor ideological. More than a decade ago, when the DOT required airlines to permit cost-free booking changes within 24 hours of purchase, Spirit Airlines responded by itemizing the cost as a “Department of Transportation Unintended Consequences Fee.”[54] The episode was instructive precisely because the underlying regulation was popular. A no-cost option to change one’s mind has value to consumers, but providing that option also imposes a real cost on the carrier, which must reserve inventory that it might otherwise sell.[55] Recognizing those costs is not hostility to consumers. It is a prerequisite for sound rulemaking.
Several recent regulatory initiatives illustrate how such costs can accumulate.
In April 2024, the DOT adopted a final rule, reinforced by the FAA Reauthorization Act of 2024, requiring automatic cash refunds in the original form of payment whenever a flight is canceled or “significantly changed.” The rule defines significant changes through bright-line thresholds, including delays of at least three hours on domestic itineraries and six hours on international itineraries, among other criteria.[56] Because passengers may reject rebooking or travel credits and instead demand cash refunds, the rule limits carriers’ ability to rely on their least costly recovery mechanism: re-accommodating passengers on later flights within their own networks. It therefore requires cash outflows precisely when operations and revenues are already under stress.
The DOT went further in a December 2024 advance notice of proposed rulemaking that contemplated a European-style compensation regime for “controllable” delays and cancellations. The proposal would have required cash payments ranging from approximately $200 to $775, depending on the length of the disruption, in addition to meals, lodging, ground transportation, and rebooking obligations.[57] Such a framework would attach a fixed per-passenger cost to operational disruptions and substantially reduce carriers’ flexibility in responding to them. Although the proposal was withdrawn in November 2025, it remains a readily available template for future regulatory action.[58]
Two related initiatives would fall particularly heavily on low-cost carriers.
First, the DOT’s April 2024 ancillary-fee disclosure rule required airlines to display baggage and change fees at the point of sale. The 5th U.S. Circuit Court of Appeals stayed the rule, finding that the airlines had made “a strong showing that the Rule exceeds DOT’s authority” and would suffer irreparable harm, including compliance costs that the industry estimated at between $5 million and $10 million. The court later affirmed the agency’s authority while remanding the rule for further proceedings.[59]
Second, the DOT proposed in August 2024 to require fee-free adjacent family seating and prohibit airlines from structuring basic-economy products to avoid that requirement.[60] Like the ancillary-fee initiatives, the proposal would directly affect the unbundled business model that underlies many ultra-low-cost carriers by converting optional paid services into mandatory free services.[61]
Viewed individually, any one of these measures may appear modest. Viewed collectively, they impose meaningful costs on the carriers least able to absorb them.
For a large legacy carrier with diversified revenue streams from premium products and loyalty programs, an individual mandate may amount to little more than operational friction. For an ultra-low-cost carrier that relies heavily on ancillary revenue and operates on exceptionally thin margins, mandated refunds, potential compensation payments, mandatory services, and limits on pricing flexibility can erode the economics that make very low base fares possible.
The broader point is cumulative. Layered on top of slot scarcity, equipment shortages, constrained access to capital, and other barriers discussed above, regulatory inflexibility becomes one more factor pushing low-cost carriers from marginal viability toward unprofitability. Spirit’s collapse illustrates the broader concern. In a high-fixed-cost, low-margin, shock-prone industry, competitive viability often depends less on any single regulatory burden than on the accumulation of many small burdens over time. The carriers serving the most price-sensitive travelers generally have the least margin for error.
The 5th Circuit’s conclusion that one of these rules likely exceeded the DOT’s statutory authority also raises a question squarely within this Subcommittee’s jurisdiction: how much of this regulatory apparatus Congress has authorized the Department of Transportation to impose in the first place.
Consistent with the foregoing analysis, I respectfully offer the following recommendations for the Subcommittee’s consideration:
The impulse to address airline concentration primarily through more aggressive merger enforcement is unlikely to produce the competitive outcomes policymakers seek. The most significant constraints on airline competition arise not from a shortage of antitrust enforcement, but from barriers that restrict entry, expansion, and adaptation before competition can occur.
Much of the competition that never materializes in this industry is foreclosed upstream: by airport capacity the government rations, by capital it restricts, by infrastructure expansion it delays, and by operational mandates that fall most heavily on the carriers least able to absorb them. If policymakers are concerned about concentration, those constraints should be the first place they look.
The most procompetitive course available to Congress is not to preserve competitors on paper, but to make competition easier in practice. That requires removing government-created bottlenecks, regularly reassessing legacy regulations, and exercising discipline before imposing new ones. Spirit’s empty gates offer a cautionary reminder that protecting a competitor is not the same as protecting competition.
I thank the Subcommittee for its attention and welcome any questions.
[1] See, e.g., Thomas W. Hazlett & Robert Crandall, Competitive Effects of T-Mobile/Sprint: Analysis of a “4-to-3” Merger, TPRC 2024 Paper (2024), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4736059 (explaining how economies of scale and scope in capital-intensive telecommunications networks can produce both relatively high concentration and consumer-welfare gains); see also Eric Fruits, Gus Hurwitz, Geoffrey A. Manne, Julian Morris & Alec Stapp, A Review of the Empirical Evidence on the Effects of Market Concentration and Mergers in the Wireless Telecommunications Industry, Int’l Ctr. for L. & Econ. (Sept. 17, 2019), https://laweconcenter.org/resources/a-review-of-the-empirical-evidence-on-the-effects-of-market-concentration-and-mergers-in-the-wireless-telecommunications-industry-2.
[2] Hazlett & Crandall, supra note 1, at 4.
[3] Alden Abbott, The Case of the Vanishing Competitor, Truth on the Mkt. (May 22, 2026), https://truthonthemarket.com/2026/05/22/the-case-of-the-vanishing-competitor (collecting recent antitrust enforcement statements concerning airline concentration).
[4] Eric Fruits, ‘Regulation and Its Reform’ by Stephen Breyer and ‘Contrived Competition’ by Richard Vietor, Truth on the Mkt. (Oct. 28, 2025), https://truthonthemarket.com/2025/10/28/regulation-and-its-reform-by-stephen-breyer-and-contrived-competition-by-richard-vietor (summarizing Stephen Breyer, Regulation and Its Reform (1982), and Richard H.K. Vietor, Contrived Competition (1994)); see also Richard H.K. Vietor, Contrived Competition: Airline Regulation and Deregulation, 1925–1988, 64 Bus. Hist. Rev. 61 (1990); Sam Peltzman, Michael E. Levine & Roger G. Noll, The Economic Theory of Regulation After a Decade of Deregulation, Brookings Papers on Econ. Activity: Microeconomics 1 (1989); Richard A. Posner, Theories of Economic Regulation, 5 Bell J. Econ. & Mgmt. Sci. 335 (1974).
[5] Stephen Breyer, Analyzing Regulatory Failure: Mismatches, Less Restrictive Alternatives, and Reform, 92 Harv. L. Rev. 547 (1979); Stephen Breyer, Regulation and Its Reform (1982) (using airline regulation as the paradigmatic example of a mismatch between regulatory tools and market problems).
[6] Breyer, Analyzing Regulatory Failure, supra note 5, at 556.
[7] Fed. Trade Comm’n v. Phoebe Putney Health Sys., Inc., 568 U.S. 216, 225 (2013) (citing FTC v. Ticor Title Ins. Co., 504 U.S. 621, 636 (1992)); see also Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 101, 106 (1980).
[8] See, e.g., Clifford Winston, Economic Deregulation: Days of Reckoning for Microeconomists, 31 J. Econ. Literature 1263 (1993).
[9] See George J. Stigler, The Theory of Economic Regulation, 2 Bell J. Econ. & Mgmt. Sci. 3 (1971) (developing the capture theory of regulation); Mancur Olson, The Logic of Collective Action (1965) (explaining how small, organized groups secure concentrated benefits while dispersing costs across an unorganized public); Sam Peltzman, Toward a More General Theory of Regulation, 19 J.L. & Econ. 211 (1976); see also Posner, supra note 4.
[10] Joshua D. Wright, Searching for Antitrust Remedies, Part II, Truth on the Mkt. (July 13, 2011), https://truthonthemarket.com/2011/07/13/searching-for-antitrust-remedies-part-ii (describing the history of computerized reservation system regulation, its failure to spur entry, and its repeal in 2004).
[11] Addison Schonland, Spirit, Frontier: Another Merger Attempt, AirInsight (Dec. 19, 2025), https://airinsight.com/spirit-frontier-another-merger-attempt.
[12] United States v. JetBlue Airways Corp., 712 F. Supp. 3d 109 (D. Mass. 2024).
[13] Dirk Auer & Ian Adams, Nonstop to Nowhere: Spirit, JetBlue, and the Limits of Merger Doctrine, Truth on the Mkt. (May 7, 2026), https://truthonthemarket.com/2026/05/07/nonstop-to-nowhere-spirit-jetblue-and-the-limits-of-merger-doctrine (detailing the transaction’s chronology and analyzing the district court’s opinion).
[14] Id.
[15] Abbott, supra note 3 (describing Spirit’s shutdown and the resulting loss of the “Spirit Effect”). The magnitude of the Spirit Effect remains disputed but consistently substantial. Relying on the airlines’ internal documents, the U.S. Department of Justice estimated that Spirit’s entry into a market reduced average fares by roughly 17%, while its exit increased fares by roughly 30%. Because those figures come from litigation filings, they warrant comparison with independent academic research. See Steven A. Morrison, Actual, Adjacent, and Potential Competition: Estimating the Full Effect of Southwest Airlines, 35 J. Transp. Econ. & Pol’y 239 (2001) (finding that low-cost carriers constrain fares well beyond their own routes and estimating approximately $12.9 billion in passenger savings in 1998, most of which stemmed from competitive spillovers rather than Southwest’s own fares).
[16] Spirit Cuts Aircraft Fleet in Half, Airways Mag. (Oct. 4, 2025), https://www.airwaysmag.com/new-post/spirit-cuts-aircraft-fleet-half.
[17] Rajesh Kumar Singh & Doyinsola Oladipo, Spirit’s Troubles Expose Limits of Premium Strategy for Low-Cost Carriers, Reuters (Oct. 10, 2025), https://www.reuters.com/legal/litigation/spirits-troubles-expose-limits-premium-strategy-low-cost-carriers-2025-10-10.
[18] Bureau of Transp. Stat., Fuel Consumption, https://data.bts.gov/stories/s/Fuel-Consumption/bwcv-dxgx; Robert Silk, IATA Downwardly Revises Airline Profit Forecast, Travel Weekly (June 8, 2026), https://www.travelweekly.com/Travel-News/Airline-News/IATA-downwardly-revises-airline-profit-forecast-2026.
[19] Singh & Oladipo, supra note 17.
[20] Auer & Adams, supra note 13 (cataloguing the causes of Spirit’s decline and its cumulative losses since 2020).
[21] Citizen Publ’g Co. v. United States, 394 U.S. 131 (1969).
[22] United States v. JetBlue Airways Corp., No. 1:23-cv-10511-WGY, ECF No. 461, at 98 (D. Mass. Jan. 16, 2024) (“Numerous Spirit witnesses explained at trial that Spirit is struggling financially—including that Spirit anticipates a $467,000,000 loss for 2023 (on top of prior losses over $1,000,000,000) and has not been profitable since 2019. These losses, though significant, do not, on their own, provide an affirmative defense to the Government’s prima facie case.”).
[23] Auer & Adams, supra note 13 (analyzing the binary nature of the failing-firm inquiry and the “durability assumption” embedded in the government’s theory of competitive harm).
[24] JetBlue, supra note 22, at 98.
[25] See, e.g., Chris Isidore, Spirit Airlines Could Be Forced Out of Business After JetBlue Deal Is Blocked, Analyst Says, CNN Bus. (Jan. 18, 2024), https://www.cnn.com/2024/01/18/business/spirit-airlines-jetblue-ruling-bankruptcy (reporting that, two days after Judge William Young’s ruling, TD Cowen analysts viewed liquidation of Spirit’s assets as more likely than a standalone recovery).
[26] JetBlue, supra note 22, at 102-03.
[27] United States v. Topco Assocs., Inc., 405 U.S. 596 (1972).
[28] JetBlue, supra note 22, at 66-67; United States v. Phila. Nat’l Bank, 374 U.S. 321 (1963); id. at 610-11; see also Abbott, supra note 3 (discussing the selective application of the “any-market” principle to out-of-market efficiencies).
[29] Jeffrey T. Prince & Daniel H. Simon, The Impact of Mergers on Quality Provision: Evidence from the Airline Industry, Kelley Sch. of Bus. Rsch. Paper No. 2014-03 (2014), https://ssrn.com/abstract=2419611.
[30] See Myongjin Kim et al., When Control Markets Are Treated: Potential Competition and Merger Retrospectives (2026), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4275346 (finding that, across four U.S. airline mergers, a 10-percentage-point increase in entry threat reduced average peripheral-route fares by 2.4% to 4.2%); C. Lanier Benkard, Aaron Bodoh-Creed & John Lazarev, Simulating the Dynamic Effects of Horizontal Mergers (2010), https://sticerd.lse.ac.uk/seminarpapers/ei24052010.pdf (finding that hub mergers tend to induce offsetting entry by rival and low-cost carriers).
[31] See, e.g., United States v. AMR Corp., 335 F.3d 1109 (10th Cir. 2003); see also Spirit Airlines, Inc. v. Nw. Airlines, Inc., 431 F.3d 917 (6th Cir. 2005).
[32] Fed. Aviation Admin., Slot Administration, https://www.faa.gov/about/office_org/headquarters_offices/ato/service_units/systemops/perf_analysis/slot_administration.
[33] 14 C.F.R. pt. 93, subpt. K, https://www.ecfr.gov/current/title-14/chapter-I/subchapter-F/part-93/subpart-K.
[34] Rachel Y. Tang, Reagan National Airport Slot and Perimeter Rules and Exemptions Authorized in 2024, Cong. Rsch. Serv., No. IN12504 (Feb. 6, 2025), https://www.congress.gov/crs-product/IN12504.
[35] Alex Macheras, Why London Heathrow Has Some of the Most Expensive Airport Slots on Earth, The Points Guy (May 15, 2019), https://thepointsguy.com/news/why-london-heathrow-has-some-of-the-most-expensive-airport-slots-on-earth (noting that a statutory rule generally limits nonstop flights from Ronald Reagan Washington National Airport to destinations within a 1,250-mile perimeter absent a statutory exemption).
[36] Gary L. Kepplinger, Gen. Couns., U.S. Gov’t Accountability Off., Subject: Federal Aviation Administration—Authority to Auction Airport Arrival and Departure Slots and to Retain and Use Auction Proceeds (Sept. 30, 2008), https://www.gao.gov/assets/b-316796.pdf.
[37] Brent Skorup, COVID-19, Ghost Flights, and Emerging Property Rights in Airport Slots, Truth on the Mkt. (Mar. 25, 2020), https://truthonthemarket.com/2020/03/25/covid-19-ghost-flights-and-emerging-property-rights-in-airport-slots.
[38] See Scott McCartney, How Sly Travelers Cut Their Airfares in Half, Wall St. J. (Dec. 4, 2019), https://www.wsj.com/articles/how-sly-travelers-cut-their-airfares-in-half-11575455400 (reporting that low-fare entry reduced average fares by roughly 17% and increased flight frequencies by roughly 30%); see also Morrison, supra note 15 (estimating that Southwest’s actual, adjacent, and potential competitive effects accounted for a substantial share of fare savings following airline deregulation).
[39] See Martin Dresner, Jiun-Sheng Chris Lin & Robert Windle, The Impact of Low-Cost Carriers on Airport and Route Competition, 30 J. Transp. Econ. & Pol’y 309 (1996) (estimating fare reductions of roughly 38% to 53% on routes entered by low-cost carriers); Austan Goolsbee & Chad Syverson, How Do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines, 123 Q.J. Econ. 1611 (2008) (finding that incumbent airlines reduced fares on routes Southwest merely threatened to enter, with more than half of Southwest’s total fare effect occurring before service began); see also McCartney, supra note 38; Morrison, supra note 15.
[40] Jerry Limone, JetBlue and WestJet Win Airport Slots at LaGuardia and Reagan National, Travel Weekly (Dec. 1, 2011), https://www.travelweekly.com/Travel-News/Airline-News/JetBlue-and-WestJet-win-airport-slots-at-LaGuardia-and-Reagan-National.
[41] Fed. Aviation Admin., Limited Waiver of the Slot Usage Requirement at DCA, JFK, and LGA (extending slot-usage waivers from July 2025 through Summer 2026), https://www.faa.gov/newsroom/limited-waiver-slot-usage-requirement-dca-jfk-and-lga.
[42] See Marc Scribner, Airline Deregulation: Past Experience and Future Reforms, Reason Found. (2023) (recommending that regulators replace administratively allocated historic slots with secondary trading, auctions, or runway-congestion pricing), https://reason.org/wp-content/uploads/airline-deregulation-past-experience-future-reforms.pdf; see also Jaap de Wit & Guillaume Burghouwt, Slot Allocation and Use at Hub Airports: Perspectives for Secondary Trading, 8 Eur. J. Transp. & Infrastructure Rsch. 147 (2008).
[43] 49 U.S.C. § 41703 (prohibiting air cabotage).
[44] 49 U.S.C. § 40102(a)(15); see U.S. Gov’t Accountability Off., U.S. Airlines: Information on DOT’s Oversight of Foreign Ownership, No. GAO-19-540R (2019), https://www.gao.gov/products/gao-19-540r; see also Jae Woon Lee & Umakanth Varottil, Against Aviation Orthodoxy: India’s Foreign Investment Regime for the Airline Industry, 44 Brook. J. Int’l L. 1 (2018) (documenting how incumbent carriers lobby to raise entry barriers and how “substantial ownership and effective control” requirements complicate liberalization).
[45] U.S. Gov’t Accountability Off., supra note 44 (recounting the U.S. Department of Transportation’s 2003 proposal to raise the foreign voting-equity ceiling to 49%).
[46] Lee & Varottil, supra note 44, at 58.
[47] Id. at 59.
[48] Id.
[49] Gaurab Aryal, Charles Murry & Jonathan W. Williams, Price Discrimination in International Airline Markets, 91 Rev. Econ. Stud. 641 (2024) (finding that prevailing airline pricing captures roughly 77% of first-best welfare, with most remaining inefficiency attributable to private information); see also Joanna Stavins, Price Discrimination in the Airline Market: The Effect of Market Concentration, 83 Rev. Econ. & Stat. 200 (2001) (finding that price discrimination intensifies as airline markets become more competitive).
[50] Seven Cnty. Infrastructure Coal. v. Eagle Cnty., 605 U.S. 168 (2025).
[51] Seven Cnty. Infrastructure Coal., slip op. at 9-10.
[52] FAA Env’t Pol’y & Operations Div. (AEE-400), FAA Order 1050.1G, FAA National Environmental Policy Act Implementing Procedures (June 30, 2025), https://www.faa.gov/regulations_policies/orders_notices/index.cfm/go/document.current/documentnumber/1050.1; U.S. Dep’t of Transp., Order 5610.1D (eff. June 30, 2025), https://www.transportation.gov/sites/dot.gov/files/2025-07/DOT_Order_5610.1D_OST-P-250627-001_508_Compliant.pdf; see also Kaplan Kirsch LLP, Significant Changes to NEPA Affecting Airport Projects, https://www.kaplankirsch.com/resources-and-news/significant-changes-to-the-national-environmental-policy-act-affecting-airport-projects.
[53] These industry characteristics are well documented. See Severin Borenstein, On the Persistent Financial Losses of U.S. Airlines: A Preliminary Exploration, Nat’l Bureau of Econ. Rsch., Working Paper No. 16744 (2011) (documenting the chronic difficulty U.S. airlines face in earning stable economic profits across business cycles); Steven Berry & Panle Jia, Tracing the Woes: An Empirical Analysis of the Airline Industry, 2 Am. Econ. J.: Microeconomics 1 (2010) (attributing more than 80% of the decline in legacy-carrier variable profits between 1999 and 2006 to increased price sensitivity, stronger consumer preferences for nonstop service, and expansion by low-cost carriers); Jaap H. Abbring & Jeffrey R. Campbell, Last-In First-Out Oligopoly Dynamics, Nat’l Bureau of Econ. Rsch., Working Paper No. 14674 (2009) (finding that sunk entry costs and demand uncertainty shorten expected survival for newer entrants and can induce the asymmetric exit of otherwise efficient firms following adverse shocks); see also Robert S. Pindyck, Sunk Costs and Risk-Based Barriers to Entry, Nat’l Bureau of Econ. Rsch., Working Paper No. 14755 (2009) (arguing that irreversibility and uncertainty increase the effective cost of committing capital).
[54] Mark Johanson, Spirit Airlines’ ‘2 Unintended Consequences Fee’, Int’l Bus. Times (Feb. 2, 2012), https://www.ibtimes.com/spirit-airlines-2-unintended-consequences-fee-404714.
[55] The point follows directly from real-options theory: an option has value to its holder and therefore imposes a corresponding cost on its writer. See Avinash K. Dixit & Robert S. Pindyck, Investment Under Uncertainty ch. 1 (Princeton Univ. Press 1994). On the underlying airline capacity-allocation tradeoff, see James D. Dana, Jr., Advance-Purchase Discounts and Price Discrimination in Competitive Markets, 106 J. Pol. Econ. 395 (1998); Ian L. Gale & Thomas J. Holmes, Advance-Purchase Discounts and Monopoly Allocation of Capacity, 83 Am. Econ. Rev. 135 (1993); Michael E. Sykuta, Options Have Value, Even If DOT Doesn’t Get It, Truth on the Mkt. (Feb. 2, 2012), https://laweconcenter.org/resources/options-have-value-even-if-dot-doesnt-get-it; Howard Beales, Richard Craswell & Steven C. Salop, The Efficient Regulation of Consumer Information, 24 J.L. & Econ. 491 (1981) (favoring disclosure-based and other less-restrictive alternatives to prescriptive mandates); James Bailey & Diana Thomas, Regulating Away Competition: The Effect of Regulation on Entrepreneurship and Employment, Mercatus Ctr., Working Paper (2015) (finding that regulatory-compliance burdens fall disproportionately on smaller firms and deter entry).
[56] U.S. Dep’t of Transp., Final Rule Requiring Automatic Refunds of Airline Tickets and Ancillary Service Fees (Apr. 24, 2024); Refunds and Other Consumer Protections, 89 Fed. Reg. 32,760 (Apr. 26, 2024), https://www.transportation.gov/briefing-room/biden-harris-administration-announces-final-rule-requiring-automatic-refunds-airline.
[57] U.S. Dep’t of Transp., Airline Passenger Rights, Advance Notice of Proposed Rulemaking, 89 Fed. Reg. 99,952 (Dec. 11, 2024); see also Eckert Seamans, DOT Launches Rulemaking on Cash Compensation and Related Consumer Protection Requirements (Jan. 6, 2025), https://www.eckertseamans.com/stay-informed/blogs/aviation/dot-launches-rulemaking-on-cash-compensation-and-related-consumer-protection-requirements.
[58] U.S. Dep’t of Transp., Airline Passenger Rights; Withdrawal, 90 Fed. Reg. 51,230 (Nov. 17, 2025), https://www.federalregister.gov/documents/2025/11/17/2025-20042/airline-passenger-rights-withdrawal. The European Union’s analogous regime, Regulation (EC) No. 261/2004, illustrates both the tendency of passenger-rights mandates to expand beyond their original scope and the administrative burdens they impose. In Sturgeon v. Condor, the Court of Justice of the European Union extended cash-compensation requirements to long delays, not merely cancellations and denied boarding. See Sturgeon v. Condor Flugdienst GmbH, Joined Cases C-402/07 & C-432/07 (C.J.E.U. 2009). Subsequent evaluations found wide disparities in enforcement across member states: the share of complaints resolved in passengers’ favor ranged from roughly 6% to more than 90%; only 14 of the then-27 member states had imposed sanctions for noncompliance; and nearly half had never imposed a sanction at all. The European Commission further found that many member states had not fully complied with the Regulation’s requirement that sanctions be “effective, proportionate and dissuasive,” and that in some jurisdictions maximum penalties fell below the costs carriers could avoid through noncompliance. See Eur. Comm’n, Evaluation of Regulation (EC) No. 261/2004: Final Report (Steer Davies Gleave 2010).
[59] Airlines for Am. v. Dep’t of Transp., No. 24-60231 (5th Cir. 2024) (granting stay); see also Pete Muntean, Airlines Sue DOT Over New Rules Requiring Disclosure of Fees, CNN (May 13, 2024), https://www.cnn.com/2024/05/13/business/airlines-sue-dot-over-new-rules-requiring-disclosure-of-fees. The 5th U.S. Circuit Court of Appeals, sitting en banc, subsequently vacated the rule. Airlines for Am. v. Dep’t of Transp., No. 24-60231 (5th Cir. Feb. 3, 2026).
[60] U.S. Dep’t of Transp., Notice of Proposed Rulemaking on Family Seating (Aug. 1, 2024); see also Gregory Speier, DOT Proposes Rule to Ban Family Seating Fees, Reed Smith (Aug. 2, 2024), https://www.reedsmith.com/our-insights/blogs/viewpoints/102jfav/dot-proposes-rule-to-ban-family-seating-fees.
[61] The importance of ancillary revenue helps explain why these measures fall most heavily on the unbundled-carrier business model. The Government Accountability Office reports that U.S. airline baggage and reservation-change fees—the only optional-service fees reported separately to the Department of Transportation—increased from approximately $6.3 billion in 2010 to $7.1 billion in 2016 (in constant 2016 dollars). Those revenues play a significant role in the profitability of ultra-low-cost carriers and help subsidize lower base fares. See U.S. Gov’t Accountability Off., Commercial Aviation: Information on Airline Fees for Optional Services, No. GAO-17-756 (2017), https://www.gao.gov/products/gao-17-756.
ICLE White Paper Executive Summary For more than a century, the United States has sought to separate banking and commerce. The impulse was largely political, not economic: a . . .
For more than a century, the United States has sought to separate banking and commerce. The impulse was largely political, not economic: a distinctly American distrust of concentrated economic power and a fear that control over credit could dominate local economies, distort markets, and threaten democratic governance. In response to banking crises, industrial consolidation, and the rise of large financial institutions, policymakers built structural rules to keep financial and commercial power apart.
This paper argues that those rationales belong to an earlier era of fragmented local banking markets, geographic restrictions, and limited competition. Even then, forcing economic forces and consumer demand into arbitrary legal categories was a losing battle. Today, the project is even less realistic. Interstate banking, embedded finance, platform economics, banking-as-a-service, and emerging technologies such as agentic artificial intelligence have transformed financial intermediation and increased demand for integrated financial and commercial services.
The wall between banking and commerce is now increasingly leaky and asymmetric. Technology companies perform quasi-banking functions, while regulated banks often serve as infrastructure providers within broader digital ecosystems. At the same time, regulators have more sophisticated supervisory tools than ever before to address risks without preserving an archaic and anticompetitive structure.
Financial regulation should therefore move away from rigid categorical separation and toward principles-based oversight focused on conduct, interoperability, competition, systemic risk, and consumer protection. Rather than prohibit integration outright, policymakers should regulate the specific behaviors and risks associated with platform finance and modern financial intermediation. The question is no longer whether banking and commerce should interact. They already do. The question is how best to govern that interaction while preserving competition, innovation, financial stability, and consumer choice.
The separation of banking and commerce has long been a defining principle of American financial regulation. Unlike most advanced economies, the United States historically restricted commercial entities from owning banks and generally prohibited banks from owning commercial enterprises. These limits sought to prevent concentrations of economic power and protect the federal safety net.[1] They were not merely technical banking rules. They reflected deep political, economic, and cultural assumptions about the dangers of concentrated financial power.
American suspicion of concentrated economic power predates the modern banking system. The United States emerged from a revolution against centralized authority and developed a political culture deeply skeptical of large institutions capable of exercising economic control over local communities.[2] These concerns shaped the nation’s political, economic, and constitutional development, particularly through the decades-long debate over the legitimacy, legality, and role of the Bank of the United States.[3] That skepticism influenced the structure of American government, federalism, and banking. Rather than concentrate banking authority in a handful of national institutions, policymakers encouraged decentralized local banking markets composed of thousands of small banks operating within geographically constrained areas.
The resulting system was unique. While many countries developed centralized banking systems dominated by a small number of national institutions, the United States produced thousands of community banks governed by overlapping federal and state regulatory frameworks that evolved incrementally over more than 160 years.[4] At its peak, the United States had nearly 25,000 commercial banks.[5] This fragmented structure reflected a deliberate preference for dispersed economic power and local control over credit allocation.
That preference also contributed to the creation of multiple banking regulators through repeated episodes of crisis-driven institutional layering. Rather than empower existing regulators to address emerging threats or replace obsolete institutions, policymakers typically added new agencies and authorities on top of existing ones. The result is one of the world’s most complex financial regulatory systems[6]—a system designed largely to stabilize a fragmented banking sector rather than manage a centralized one.
The original rationale for separating banking and commerce was grounded in legitimate concerns about the structure of the American economy and regulatory system at the time.[7] Policymakers feared that firms controlling both commerce and credit could distort markets, disadvantage competitors, and threaten financial stability. In local economies characterized by limited competition and government-created entry barriers, those concerns were substantial.[8] Banks often occupied monopolistic or near-monopolistic positions within their communities,[9] and policymakers worried that combining control over credit with commercial activity would create private economic empires capable of dominating regional economies.[10]
Conditions today are markedly different. Technological innovation and changes in market structure have increased the potential benefits of integrating commerce and finance while weakening many of the concerns that originally justified structural separation. Interstate banking increased competition among financial institutions. Digital platforms now integrate payments, lending, and other financial services directly into commercial ecosystems. Large technology firms increasingly perform quasi-banking functions without bank charters. Embedded finance and banking as a service arrangements further blur the distinction between financial and nonfinancial firms.[11]
As the concerns that once justified separation have weakened, the legacy system has increasingly become an obstacle to innovation and growth. Combining commercial enterprises and financial services can create convenient one-stop shopping experiences, enhance loyalty and rewards programs, generate consumer discounts, and improve information flows between commercial and financial services. Integration may also strengthen data security and allow more personalized consumer experiences.[12] Perhaps most importantly, it offers opportunities to expand financial inclusion by increasing consumer choice and competition.
To understand the separation of banking and commerce, it is useful to begin with a basic question: What distinguishes a bank from other financial firms? In legal terms, a bank—or more precisely, an insured depository institution—is authorized to accept federally insured deposits from the public.[13] That characteristic confers two enormously valuable privileges.
First, deposit insurance provided by the Federal Deposit Insurance Corporation guarantees depositor funds up to statutory limits, giving banks access to a stable, low-cost funding source unavailable to uninsured competitors. Second, access to the payments system—including Federal Reserve payment rails and interbank settlement infrastructure—allows banks to clear and settle transactions in ways that nonbanks generally cannot directly replicate.
These privileges explain why financial firms seek bank charters. They also explain why banks accept the regulatory obligations that accompany them, including capital requirements, safety-and-soundness supervision, and, historically, restrictions on commercial activities. The central premise behind separating banking and commerce is straightforward: Because banks benefit from a publicly supported safety net, the public has a legitimate interest in limiting the risks they may undertake. Commercial enterprises, which are generally more volatile and more exposed to market forces than traditional banking activities, represent precisely the type of risk that the regulatory framework evolved to constrain.
Today, evolving technology and changing consumer preferences are eroding some of banks’ traditional advantages. In May 2026, President Donald Trump issued an executive order directing the Federal Reserve to consider regulatory changes that would allow nonbanks, including fintech and digital-asset firms, greater access to Federal Reserve payment rails.[14] At the same time, nonbanks are increasingly issuing branded stablecoins or announcing plans to do so, a trend the GENIUS Act is likely to accelerate.[15]
Yet these developments have been asymmetric. Nonbanks increasingly enjoy access to privileges once associated exclusively with chartered banks, while banks remain constrained by legacy restrictions that limit their ability to offer complementary commercial products and services. The traditional wall separating banking and commerce rested on concerns that banks could leverage government subsidies and regulatory privileges to gain unfair advantages in commercial markets, or that commercial activities would increase prudential risk. As those concerns diminish, the case for maintaining the wall in its current form weakens as well.
This paper argues that the separation of banking and commerce was a reasonable, if imperfect, response to the economic and political conditions that produced it. The doctrine reflected real concerns about concentrated financial power, fragile local banking markets, weak supervisory tools, and the risks of extending the federal safety net into commercial enterprise. But those historical rationales no longer map cleanly onto modern financial markets. Interstate banking, digital platforms, embedded finance, stablecoins, banking as a service, and more sophisticated supervisory technology have blurred the functional boundary between banking and commerce while expanding the tools available to monitor and manage risk.
The central question is therefore no longer whether banking and commerce should interact. They already do. The challenge is how to govern integrated financial ecosystems in ways that maximize competition, consumer welfare, innovation, and systemic stability while limiting abusive conduct, regulatory capture, and excessive concentrations of economic power. This paper contends that modern regulation should move away from categorical structural prohibitions and toward a principles-based framework focused on conduct, risk, interoperability, data governance, and proportional supervision. That shift does not mean ignoring safety-and-soundness concerns. It means addressing those concerns directly with tools better suited to a financial system in which the old wall between banking and commerce has already become porous.
The historical development of banking regulation in the United States reflected broader concerns about economic concentration, industrial consolidation, and their implications for democratic governance. The separation of banking and commerce emerged gradually through a series of statutes and regulatory reforms designed to limit the ability of financial institutions to dominate commercial markets.
The American financial regulatory system did not emerge from a single coherent design. Instead, it evolved incrementally in response to financial crises, political pressures, and periods of economic instability. Reform efforts typically addressed the most recent shock or perceived market failure, layering new statutes, supervisory authorities, and regulatory agencies onto existing frameworks without fundamentally reconsidering the broader structure of the financial system.[16]
Over time, this crisis-driven approach produced a fragmented regulatory architecture characterized by overlapping jurisdictions, inconsistent policy objectives, and persistent tensions among competition, innovation, financial stability, and decentralization.[17] Understanding the historical origins, political motivations, and economic assumptions underlying these developments is essential to evaluating both the modern separation of banking and commerce and whether the rationale for that separation remains persuasive in today’s rapidly evolving financial system.
The American financial system was shaped by a deep distrust of concentrated power.[18] From the colonial era through the early Republic, agrarian interests expressed concern about the economic and political influence of banks. Thomas Jefferson and the Anti-Federalists favored decentralized political and economic institutions, viewing central financial authorities as threats to democratic self-government. As one scholar observes, banks were granted valuable privileges through special legislative charters, making bankers “keepers of credit and currency” who exercised substantial influence over both the economy and the political system.[19]
The Federalists’ victory in the debate over the First Bank of the United States did not resolve these tensions. When President Andrew Jackson vetoed the recharter of the Second Bank of the United States in 1832, he argued that the institution concentrated excessive economic and political power, warning that its influence was “dangerous to Government and the country.”[20] Jackson contended that centralized financial institutions could exert undue influence over both politics and commerce, benefiting elites at the expense of ordinary citizens and threatening democratic governance.[21]
This suspicion of concentrated financial power shaped American banking policy throughout the 19th century. Following the demise of the Second Bank of the United States, state governments became the exclusive chartering authorities for banks.[22] States frequently prohibited interstate banking, restricted branch banking, and imposed unit-banking requirements to preserve local control over credit.[23] Policymakers believed smaller, locally controlled banks would be more responsive to community needs and less capable of dominating regional economies.[24]
That decentralization came at a cost. Banks operating in geographically limited markets lacked diversification and remained vulnerable to local economic shocks. Financial panics in 1837, 1873, 1893, and 1907 exposed the instability of the fragmented banking system. Even so, policymakers generally preferred the risks associated with decentralization to what they viewed as the greater danger of concentrated financial power.
The concerns underlying the separation of banking and commerce can also be understood through the historical experience of company stores in the 19th and early 20th centuries. In many industrial towns, employers paid workers in scrip redeemable only at employer-owned stores. This arrangement allowed firms to control wages, credit, and commerce simultaneously, creating systems of economic dependency that limited worker mobility and distorted local markets.[25]
Because workers were effectively locked into purchasing goods from their employers, firms could charge inflated prices and deepen employees’ economic dependence. The result was a vertically integrated system combining labor, credit, and retail markets that exhibited characteristics of both monopsony power and credit dependency. In response, states enacted “anti-truck” laws requiring employers to pay workers in lawful U.S. currency rather than company-issued scrip.
Banking regulations were not designed specifically to address company stores, but the analogy is instructive. Policymakers feared that institutions controlling access to credit could similarly influence downstream commercial behavior and distort competitive markets. The separation of banking and commerce is rooted, in part, in a broader effort to prevent firms from controlling multiple complementary economic functions in ways that undermine competition and economic freedom.
The National Bank Act (NBA) emerged during a period of profound economic and institutional change. The statute was not merely a technical banking reform. It responded to Civil War financing needs, monetary instability, and growing pressure for a more integrated national financial system.[26] Although these challenges reached a crisis point during the Civil War, their origins lay in the earlier “Free Banking Era” (1837–1863).
During that period, banking remained largely a matter of state regulation. Hundreds of banks issued their own banknotes, and the United States lacked a national currency.[27] Currency instability was pervasive. Merchants often relied on “banknote reporters” to determine the value of various notes, which depended heavily on both the solvency of the issuing bank and its geographic distance from the holder.
Particularly notorious were so-called “wildcat banks,” which operated in remote locations and issued notes that were difficult to redeem. When redemption was attempted, the issuing bank often failed. Economic downturns frequently triggered bank failures and widespread runs, contributing to severe contractions during the Panics of 1837 and 1857.
The Free Banking Era also hampered national financial coordination. The federal government struggled to manage the money supply, stabilize credit markets, and finance major national initiatives. The Civil War exposed these weaknesses dramatically. Although customs duties and land sales had historically provided most federal revenue, they proved insufficient to finance wartime expenditures. Congress responded by creating new revenue sources and a more integrated banking system through the National Banking Acts of 1863 and 1864.[28]
The NBA pursued three principal objectives: creating a national currency, financing the Civil War, and establishing federal bank supervision.[29] It created a uniform national currency backed by U.S. Treasury bonds. By requiring banks to purchase federal bonds in order to issue notes, the Act simultaneously created demand for government debt and helped finance the Union war effort.
The statute also established the national banking system and created the Office of the Comptroller of the Currency (OCC). Nationally chartered banks could engage in the “business of banking” and activities incidental to it. Although the Act neither expressly prohibited commercial activity nor comprehensively defined banking, its narrow conception of permissible banking functions implicitly limited direct participation in commerce.
The NBA identified powers “incidental” to banking that included discounting and negotiating commercial paper, receiving deposits, exchanging foreign currency, dealing in precious metals, making loans secured by personal guarantees, and circulating currency. These restrictions were primarily prudential. By confining banks to financial activities, lawmakers sought to protect depositors and preserve confidence in the banking system.
Congress further strengthened the national banking system through the Internal Revenue Act of 1866, which imposed a 10% tax on notes issued by state-chartered banks. The tax effectively eliminated state-bank notes by making their issuance economically impractical, encouraging banks to join the national system.[30]
The NBA also deftly avoided the central political controversy that had doomed the two Banks of the United States: fears of a powerful national bank closely aligned with the federal government. Rather than creating a centralized financial institution, Congress relied on the existing network of thousands of small banks to circulate the national currency and perform quasi-public functions.
As Hugh McCulloch, the first comptroller of the currency, observed, the new system accomplished the government’s objectives without creating a national bank capable of controlling “the business and politics of the country. It can have no concentrated political power…. It will concentrate in the hands of no privileged persons a monopoly of banking.”[31]
The decentralized banking structure established by the National Bank Act persisted well into the post-Civil War era, even as the national economy and federal government expanded dramatically. As Jamie Grischkan observes, the system reflected an implicit political bargain: to alleviate concerns about concentrated financial power, policymakers preserved a banking system composed of thousands of small institutions scattered across the country.
The result was a fragmented banking sector that effectively divided the nation into numerous local banking monopolies.[32] Many towns and rural communities had only one or a handful of commercial banks. To preserve the stability of this system, regulators often shielded banks from competition, even while acknowledging the resulting economic inefficiencies. Supporters justified these restrictions by emphasizing the public-utility characteristics of banking and the political value of maintaining dispersed financial power. As Grischkan explains, “by the dawn of the twentieth century, thousands of national and state unit banks dotted the landscape, a geographically segmented and peculiarly fragmented financial structure that limited competition in the service of democratic ideals.”[33]
These institutional arrangements did not eliminate broader concerns about concentrated economic power. During the Second Industrial Revolution (roughly 1870–1914), rapid industrialization transformed the American economy. Millions of Americans moved from farms to cities, immigration expanded the labor force,[34] and industrial giants such as Standard Oil and U.S. Steel emerged. Large corporations increasingly organized themselves as trusts, allowing a relatively small group of executives and financiers to control multiple firms across industries.
Investment banks played a central role in this transformation. They financed industrial expansion, organized major mergers, and often placed allies on corporate boards. As industrial consolidation accelerated, concerns intensified that a small group of financial institutions exercised excessive influence over both the economy and the political system. Interlocking directorates, concentrated control of credit, and the emergence of large financial conglomerates fueled fears that financial elites could dominate multiple sectors simultaneously.
Louis Brandeis became one of the most prominent critics of this concentration of power. He accused J.P. Morgan and other members of the so-called “Money Trust” of controlling “the life blood of business” through their influence over the flow of money and credit. As Brandeis argued:
Thus four distinct functions, each essential to business, and each exercised, originally, by a distinct set of men, became united in the investment banker. It is to this union of business functions that the existence of the Money Trust is mainly due.[35]
The Panic of 1907 heightened these concerns and helped pave the way for major financial reforms. Triggered by speculation and bank runs, the crisis exposed weaknesses in the American financial system and highlighted the absence of a central bank. In its aftermath, the country relied heavily on a small group of private financiers—most notably Morgan—to coordinate rescue efforts and stabilize markets.[36]
Morgan’s intervention may have prevented a broader collapse, but it also reinforced fears about concentrated financial power. Many observers found it troubling that a handful of Wall Street financiers could exercise quasi-central-bank authority over the nation’s financial system without democratic accountability.[37]
Those concerns culminated in the House of Representatives’ 1912 investigation of the Money Trust. Conducted by a subcommittee of the House Committee on Banking and Currency chaired by Rep. Arsène Pujo (D-La.), the inquiry documented the extent to which major financiers exercised influence through board memberships, underwriting relationships, and concentrated control of credit.[38] The Pujo Committee’s findings strengthened support for the structural antitrust principles championed by Brandeis and other Progressive Era reformers.
Brandeisian antitrust philosophy treated concentrated economic power as inherently dangerous, even absent direct evidence of consumer harm.[39] Preserving decentralized market structures was itself viewed as an important public-policy objective. The concern was not merely economic. Brandeis and other Progressives believed concentrated economic power could corrupt democratic institutions by allowing powerful private interests to shape government policy and obstruct reform.[40]
Subsequent reforms sought to address the structural sources of both financial and industrial concentration. Congress established the Federal Reserve System in 1913 to provide a central bank and reduce reliance on private financiers during periods of financial stress. A year later, Congress created the Federal Trade Commission to police unfair methods of competition and enacted the Clayton Act to strengthen merger enforcement and prohibit interlocking directorates among competing firms.
Although the Clayton Act was not principally concerned with separating banking and commerce, it reflected the same underlying concern that motivated other Progressive Era reforms: limiting the ability of financial elites to coordinate industries and exercise influence across multiple sectors through ownership, governance, and control of credit.
The Banking Act of 1933, commonly known as Glass-Steagall, emerged from the banking collapse of the Great Depression. A key precursor was the Senate Banking Committee investigation led by Banking Committee Chief Counsel Ferdinand Pecora in the early 1930s. The Pecora hearings revealed conflicts of interest, insider dealing, and speculative securities practices that heightened concern about exposing depositor-backed institutions to capital-market volatility.[41] Those findings strengthened support for structural reforms, including the separation of commercial and investment banking.[42]
Glass-Steagall also reflected the New Deal’s broader extension of Progressive Era concerns about concentrated economic power, conflicts of interest, and the use of federally supported banks to subsidize speculative or commercial ventures. Policymakers sought to restore trust in banking by rethinking the relationship among finance, risk, and public confidence.
Glass-Steagall separated commercial banking from investment banking and introduced federal deposit insurance through the Federal Deposit Insurance Corporation (FDIC).[43] Commercial banks took deposits and made loans to businesses and households. Investment banks underwrote and sold securities, helping companies raise capital in financial markets. By separating those functions, Glass-Steagall sought to reduce conflicts of interest, limit speculative risk, and better protect depositor funds.[44]
The statute rested on the premise that the best way to reduce risks to the banking system was to separate ordinary banking—deposit-taking and lending—from activities considered riskier, such as securities issuance and trading. By removing deposit-funded institutions from volatile capital markets, Congress sought to reduce conflicts of interest in financial intermediation and align bank profitability more closely with long-term credit quality, loan performance, and interest-margin income rather than speculative securities activity.[45] Glass-Steagall thus represented a deliberate regulatory departure from integrated financial models, reflecting a judgment that integration’s systemic risks outweighed its potential efficiencies.
The special treatment of banks rests on what might be called the deposit-insurance bargain. When Congress created the FDIC and enacted Glass-Steagall, it was responding to mass bank runs and institutional collapses that wiped out depositors’ savings and destabilized the broader economy. Deposit insurance was the solution. But insurance creates moral hazard—the risk that protected institutions will take greater risks because someone else bears part of the loss. For that reason, insured risks must be bounded and manageable.
A bank that accepts federally insured deposits and then uses those funds to finance volatile commercial ventures—airlines, real estate development, or manufacturing, for example—exposes the deposit-insurance fund, and ultimately taxpayers, to losses unrelated to the traditional banking risks the fund was designed to cover. Government-sponsored deposit insurance also creates a powerful subsidy by allowing banks to raise capital more cheaply than ordinary businesses, giving banks a potential competitive advantage over nonbank firms.[46] That subsidy helps justify the regulatory limits that accompany it. Banks that benefit from the public safety net must accept constraints on the risks they take and on their ability to use government-backed privileges for competitive advantage.
At the same time, Glass-Steagall doubled down on the anticompetitive features of the National Bank Act by prohibiting interest on checking accounts and limiting interest rates on other deposits.[47] The Banking Act of 1935 further entrenched banking’s local-monopoly and public-utility structure by requiring the comptroller of the currency to consider the “convenience and needs of the community to be served” before approving a new bank charter.[48]
Regulators protected this inherently fragile system of small, undiversified banks by insulating them from competition, limiting entry, and effectively guaranteeing comfortable year-after-year profits. [49] As Prasad Krishnamurthy observes, “It would be difficult to come up with a better example of regulation operating to enforce a cartel than New Deal bank regulation.”[50] That approach did little for consumers or the broader economy.
A few years after Glass-Steagall’s enactment, President Franklin D. Roosevelt articulated the New Deal philosophy the statute embodied.[51] Echoing Brandeis’ earlier critique that the Money Trust had come to control large swaths of the American economy, Roosevelt warned:
Close financial control, through interlocking spheres of influence over channels of investment, and through the use of financial devices like holding companies and strategic minority interests, creates close control of the business policies of enterprises which masquerade as independent units. That heavy hand of integrated financial and management control lies upon large and strategic areas of American industry.[52] [Emphasis added.]
Roosevelt acknowledged that large-scale industry had become central to the modern economy, but he argued that “industrial empire building, unfortunately, has evolved into banker control of industry.” In his view, this concentration threatened “the small business man” and illustrated how unchecked economic power could corrupt democratic institutions. Roosevelt also invoked the specter of fascism, warning that concentrated private power could become a threat not only to competition, but to constitutional government.[53]
From the late 1940s through the 1960s, both commercial enterprises and financial institutions expanded significantly in size and complexity. At the same time, increasingly sophisticated corporate structures emerged, particularly bank holding companies. These organizations allowed firms to maintain the formal appearance of separate unit banks while controlling multiple financial institutions through parent companies that often operated beyond the full reach of existing regulatory frameworks.
Policymakers viewed these developments with growing concern. Influenced by New Deal traditions of trust-busting and longstanding skepticism of concentrated economic power, legislators and regulators worried about the implications of large financial-industrial conglomerates for competition, financial stability, and democratic governance. The broader Cold War environment reinforced those concerns. Excessive concentrations of private economic power were sometimes viewed as inconsistent with the decentralized and competitive form of capitalism the United States sought to distinguish from centrally planned economies.[54]
Transamerica Corp. became the most prominent example of these concerns.[55] Through a complex network of subsidiaries, Transamerica controlled Bank of America and dozens of other banks operating hundreds of offices. It also held substantial interests in insurance and a wide range of commercial enterprises, including a movie studio, record company, airline, car-rental company, manufacturing businesses, title-insurance firms, and consumer-finance companies.
To many policymakers, structures like Transamerica suggested the possibility of private financial empires capable of exercising nationwide influence over the allocation of credit. Yet the concerns were largely prospective rather than reactive. Congressional investigations uncovered little evidence of actual abuse by Transamerica or other firms.[56]
Even so, legislators worried that financial conglomerates could direct credit toward affiliated businesses, disadvantage independent competitors, and use depositor-backed institutions to support weaker firms within their corporate networks. These concerns exposed an important gap in the existing regulatory framework. While statutes such as Glass-Steagall regulated the activities of individual banks, they did not adequately constrain the activities of parent companies controlling multiple nominally independent institutions. Firms could comply with restrictions imposed on banks while effectively integrating banking and commerce at the corporate-group level.
Congress responded by enacting the Bank Holding Company Act (BHCA) of 1956.[57] As Mehrsa Baradaran observes, “Notably, the BHCA was a reaction to a perceived threat that had not yet materialized.”[58] The statute represented the high-water mark of structural separation in American banking law. It extended regulatory oversight beyond individual banks to the holding companies that controlled them and generally prohibited bank holding companies from engaging in nonfinancial commercial activities.
By doing so, it sought to prevent commercial firms from controlling banks and to limit the ability of banking organizations to expand into commercial industries.[59] More broadly, it reflected a policy objective of keeping credit allocation independent, competitive, and insulated from conflicts of interest. The statute also represented an early attempt to combat regulatory arbitrage by regulating entire corporate groups rather than individual legal entities.
Viewed in hindsight, however, the BHCA also marked the point at which the logic of structural separation began colliding with broader technological and economic trends. Advances in computing, telecommunications, and information processing increasingly made centralized and nationwide delivery of financial services both feasible and efficient.[60] The regulatory framework, by contrast, remained rooted in assumptions developed during an era of local banking markets and geographic isolation.
At times, efforts to fit new technologies into existing regulations bordered on the absurd. For example, geographic branching restrictions once led regulators to classify automated teller machines (ATMs) as bank “branches” subject to location-based limits.[61] Such outcomes reflected the growing difficulty of preserving a regulatory system designed for a radically different technological environment.
Banks continued to innovate around these constraints. As one commentator observed in 1983 regarding geographic restrictions on banking competition, “[T]hese statutory prohibitions merely hobble banking organizations in their ability to compete rather than prevent that competition.”[62]
By the latter half of the 20th century, the core assumptions underlying structural separation increasingly faced pressure from technological change, evolving consumer demands, and the growing integration of national markets. The following decades would witness a gradual but persistent erosion of many of the restrictions that had defined American banking law since the New Deal.
In the decades following the BHCA, the costs of America’s fragmented banking system became increasingly apparent. During the 1960s and 1970s, the United States experienced slow economic growth, high inflation, repeated recessions, and declining international competitiveness. The simultaneous combination of high inflation, high unemployment, and sluggish growth became known as “stagflation”—a phenomenon many economists had previously believed impossible.[63]
At the same time, the United States faced growing competitive pressure from Europe and Japan, rising costs associated with maintaining the postwar welfare state, and the economic demands of the Cold War.[64] Together, these challenges increased pressure on policymakers to promote economic growth, productivity, innovation, and competition. Across a wide range of industries, regulators and economists began reexamining rules that limited competition and protected incumbent firms.
Beginning under President Gerald Ford and accelerating under President Jimmy Carter, Congress and federal regulators dismantled anticompetitive regulatory structures in industries ranging from airlines and trucking to telecommunications and energy. Financial regulation did not escape this scrutiny. Beginning with the Depository Institutions Deregulation and Monetary Control Act of 1980, Congress enacted a series of reforms intended to modernize banking, increase competition, expand financial inclusion, and encourage innovation.[65] The era of protected local banking monopolies and “bankers’ hours” was coming to an end.
This broader shift in thinking also transformed views about the separation of banking and commerce. As Bernard Shull observed, barriers to competition combined with government subsidies such as deposit insurance created concerns that banks could enjoy unfair advantages when competing against nonbank firms.[66] Reducing those barriers and privileges therefore became an important precondition for allowing greater competition between banking and commercial enterprises.
Meanwhile, the practical distinction between banking and commerce was steadily eroding. Although the legal separation remained formally intact, technological change, financial innovation, regulatory exceptions, and evolving consumer preferences increasingly blurred the line between financial and commercial activity. By the early 1980s, the separation doctrine was already under significant pressure from both economic reality and regulatory practice.
One source of pressure came from changing views about competition and regulation. During much of the 20th century, banking regulation reflected assumptions similar to those that guided antitrust policy.[67] Policymakers often sought to preserve competition by preserving competitors—favoring large numbers of small firms and viewing consolidation with suspicion. In banking, this approach produced extensive restrictions on branching, interstate banking, interest rates, and entry.
By the 1970s and 1980s, those assumptions increasingly came under challenge.[68] Empirical research found little consistent relationship between market structure and competitive outcomes.[69] Economists also recognized that many firms gained market share not through anticompetitive conduct, but by innovating and offering consumers better products at lower prices. Large firms were not necessarily less competitive than small firms; in many cases, economies of scale and scope allowed them to deliver substantial benefits to consumers.
At the same time, economists increasingly recognized that complex regulatory systems often empowered organized interest groups rather than protecting consumers.[70] Banking regulations that purportedly protected competition frequently insulated incumbent institutions from competitive pressure. Geographic restrictions, entry barriers, and limits on product offerings reduced incentives to innovate and often increased costs for consumers.[71]
These changing ideas influenced banking policy. First intrastate branching and later interstate banking gained support as tools to increase competition, reduce local monopolies, improve service quality, and expand access to financial services. Larger banking organizations could exploit economies of scale, invest in new technologies, and spread risks across broader geographic markets. Increased competition also weakened discriminatory practices that had persisted under less competitive regulatory regimes.
The result was a gradual but important shift away from the assumption that decentralized banking structures were inherently superior. Increasingly, policymakers viewed competition, innovation, and consumer welfare—not simply the preservation of small institutions—as the primary objectives of financial regulation.
Even as the legal separation of banking and commerce remained on the books, the boundary between the two became increasingly difficult to maintain in practice. Although policymakers frequently described separation as a foundational principle of American banking law, the wall was never absolute. Over time, Congress, regulators, and market participants created numerous exceptions that weakened the conceptual clarity of the distinction.
One source of erosion came from statutory and regulatory carve-outs. Although the BHCA prohibited bank holding companies from engaging in general commercial activities, it permitted activities deemed “closely related to banking.” Over time, that category expanded substantially through regulatory interpretation and legislative amendment.[72] Financial institutions increasingly participated in data processing, leasing, insurance, securities activities, real-estate services, and other businesses possessing both commercial and financial characteristics. These developments demonstrated that the distinction between banking and commerce depended less on clear economic principles than on evolving regulatory judgments.
Alternative charters created additional exceptions. Savings and loan associations, industrial loan companies (ILCs), credit-card banks, and certain trust companies operated outside portions of the traditional bank-holding-company framework.[73] Commercial firms could therefore obtain limited banking powers indirectly, creating competitive asymmetries in which traditional banks remained constrained by separation rules while newer entrants exploited regulatory gaps to offer bank-like products and services.[74]
Perhaps the most striking example was Sears, Roebuck and Co. Founded as a mail-order retailer, Sears gradually expanded into consumer finance. By the 1970s and 1980s, it had become the nation’s largest credit-card issuer, far surpassing any individual bank.[75] Sears owned Allstate Insurance, Dean Witter Reynolds, and Coldwell Banker. In 1985, it launched the Discover Card and built a payment network capable of competing with Visa, Mastercard, and American Express.
At that point, Sears was arguably as much a financial institution attached to a retail chain as a retailer offering credit.[76] Yet Sears never qualified as a bank holding company. When it acquired Greenwood Trust Co. in 1985 to support Discover, it stripped the bank of its commercial-lending authority specifically to avoid BHCA classification.[77]
Sears was hardly unique. JCPenney, Target, Nordstrom, and other retailers developed substantial financial-services operations while remaining outside the traditional banking framework. Today, the trend has accelerated. Apple Pay, PayPal, Amazon, Starbucks, Target, Kroger, and numerous other firms now provide payment services, prepaid products, digital wallets, and other financial offerings that would have seemed remarkably bank-like only a few decades ago.
Starbucks provides a particularly revealing example. At the end of fiscal year 2025, the company reported approximately $1.8 billion in stored-value card liabilities and deferred revenue associated with prepaid balances held through gift cards and mobile-app accounts.[78] These consumer funds function in many respects like deposits, yet they remain outside the traditional banking system and are not protected by FDIC insurance.
The persistence of these business models reflects strong consumer demand for integrated financial and commercial services. Consumers value convenience, one-stop shopping, rewards programs, and seamless payment experiences. Commercial firms consistently sought to expand into financial services because doing so created value for both businesses and consumers.
As a result, Congress and regulators found themselves engaged in a recurring cycle of patching gaps in an increasingly outdated regulatory framework. While regulators could generally prevent banks from offering certain commercial services, they found it far more difficult to prevent commercial firms from offering financial services. The wall thus became increasingly asymmetric. Banks remained subject to restrictions on commercial activity, while commercial firms gained growing access to financial services through exceptions, partnerships, and alternative organizational forms.
The erosion extended beyond retail payments and consumer finance. Industrial loan companies, credit-card banks, and various fintech partnerships gained access to FDIC insurance despite operating outside the traditional bank-holding-company structure.[79] Many fintech firms now provide customers with pass-through deposit insurance through “for benefit of” account arrangements maintained at partner banks.[80] These developments demonstrate that commercially affiliated firms and technology platforms already participate extensively in the federally insured banking ecosystem.
The debate today is therefore not whether banking and commerce should interact. They already do. The more relevant question is where regulatory boundaries should be drawn and what safeguards are necessary to manage the risks of integration. Longstanding exceptions demonstrate that policymakers have repeatedly tolerated varying degrees of integration when supervision, capital requirements, activity restrictions, or other safeguards were deemed sufficient to manage risk.[81]
The persistence of integrated financial and commercial services reflects more than regulatory arbitrage. It also reflects substantial consumer demand. Consumers increasingly value products that combine shopping, payments, credit, rewards programs, and financial management into a single, convenient experience. Allowing greater integration of banking and commerce can increase competition, expand consumer choice, generate economies of scale and scope, improve risk assessment, encourage innovation, and promote financial inclusion.
The most obvious benefit is increased competition. Allowing banks to offer certain commercial services, and allowing commercial firms to offer financial services subject to appropriate safeguards, can put competitive pressure on incumbents in both markets. Greater competition can lower prices, improve quality, expand consumer choice, and encourage firms to develop more useful products.
Integration can also create informational efficiencies. A clearer picture of a consumer’s payment patterns, purchasing behavior, and financial condition can help firms improve fraud detection, assess credit risk more accurately, design better products, and offer more relevant discounts or rewards. Consumers already experience some of these benefits when banks flag unusual transactions that depart from established spending patterns. Integrating financial and commercial information, even for only a portion of a consumer’s purchases, can provide richer information that improves security and responsiveness.
Those same information flows can support more useful consumer products. For example, using a credit card to book a flight can generate information that helps market hotel rooms, rental cars, dining options, and other travel-related services. If a bank could invest in or create a subsidiary offering some of those services, it might provide consumers with additional discounts, loyalty rewards, and convenience. Properly structured, those arrangements could lower prices while making financial and commercial services easier to use.
The same logic applies to sports and entertainment. Financial institutions already hold naming rights for many arenas and stadiums.[82] Allowing banks to sell tickets to concerts and sporting events through branches or online platforms could increase convenience and give consumers alternatives to high-fee ticketing intermediaries. Yet such activity could run afoul of the BHCA despite the apparent benefits to consumers and competition.
More broadly, allowing financial services to be distributed through retail channels could offer consumers longer service hours, more convenient locations, integrated rewards, easier dispute resolution, and one-stop shopping. Shared infrastructure—including branches or stores, information-technology systems, marketing, advertising, and customer service—can reduce costs and streamline delivery. The core regulatory question is how to protect insured deposits if an affiliated commercial business fails. But prohibiting banks from offering these services outright creates its own risk by steering consumers toward nonbank providers that face fewer restrictions while offering bank-like services.
Walmart’s experience illustrates the potential consumer benefits of greater integration.[83] For more than a decade, Walmart unsuccessfully sought a financial-services charter, first as a thrift holding company and later as an industrial loan company.[84] Blocked from offering a full range of financial services, Walmart nevertheless developed Money Centers that provide check cashing, money orders, remittances, wire transfers, and other products.
Where Walmart competes in these markets, its prices have often been substantially lower than those charged by incumbent providers, forcing competitors to cut prices in response.[85] Walmart’s success in lowering prices and expanding access suggests that entry by other large retailers or technology firms, such as Amazon, could further improve quality, reduce costs, and expand consumer choice. The same logic could also allow banks to offer more convenient in-person or online shopping experiences when appropriate safeguards are in place.
Integration may also improve short-term liquidity and reduce avoidable consumer harm. A retailer with visibility into a consumer’s financial condition may be able to distinguish between a consumer who cannot pay and one whose funds will arrive shortly. Rather than triggering an overdraft, declined transaction, or missed purchase, an integrated provider could allow a consumer to complete a purchase or repair a car based on reasonable confidence that funds will soon be available. Used responsibly, that kind of information can support better credit decisions and more humane consumer-finance products.
These benefits do not eliminate legitimate regulatory concerns. Integration can create risks involving conflicts of interest, tying, data misuse, excessive concentration, and losses that might threaten insured deposits. But those concerns do not necessarily justify categorical separation. The better question is whether regulators can address specific risks through supervision, capital requirements, activity restrictions, affiliate-transaction rules, consumer-protection enforcement, and other targeted safeguards while preserving the benefits that integration can offer consumers and the economy.
Technological developments further weakened the traditional distinction between banking and commerce. Historically, banks operated primarily as localized institutions that accepted deposits, made loans, and processed payments within geographically constrained markets. By the late 20th century, advances in telecommunications, electronic payments, computing, and data processing increasingly transformed finance into an information business.
Automated teller machines (ATMs), electronic funds-transfer (EFT) systems, national credit-card networks, computerized underwriting, and digital communications reduced the importance of geographic and institutional barriers. Commercial firms with large customer networks and sophisticated data capabilities increasingly possessed competencies once associated primarily with financial institutions. Retailers, telecommunications companies, and technology firms began offering payment services, consumer credit, and other financial products.[86] Even when these firms were not legally classified as banks, they increasingly performed functions traditionally associated with banking.
This functional convergence weakened the logic of regulating institutions solely based on charter type. A commercial firm could influence access to credit, consumer payments, and financial data flows without technically becoming a bank. As a result, formal legal distinctions increasingly diverged from economic reality.
The growth of securitization and capital markets further blurred traditional boundaries. Historically, banks served as the primary intermediaries between savers and borrowers. By the 1980s, however, a growing share of financial intermediation occurred through securities markets rather than bank balance sheets. Large corporations increasingly obtained financing directly through bond and equity markets, while nonbank financial firms replicated many traditional banking functions.[87]
These developments exposed a deeper conceptual problem. If commerce and finance were already intertwined through technology, data, payments, and capital markets, maintaining a rigid institutional separation became harder to justify on functional grounds. Critics increasingly argued that banking law was preserving categories developed for an earlier industrial economy characterized by localized banking, paper transactions, and geographically constrained markets.[88] In an increasingly digital and service-oriented economy, information, payments, and credit flowed across sectors in ways that made the traditional boundary appear increasingly artificial.
Defenders of separation responded that technological change strengthened rather than weakened the case for safeguards. They feared that commercial firms with extensive consumer data, powerful distribution networks, and substantial market power could use affiliated financial operations to entrench dominance, allocate credit preferentially, or extend economic concentration into the financial system.[89] In their view, technological convergence did not eliminate the concerns underlying separation; it merely transformed them. Questions of local credit monopolies increasingly gave way to concerns about data control, platform dominance, network effects, and systemic risk.
Those concerns remain relevant today. The rise of platform economies, embedded finance, fintech partnerships, digital wallets, and technology firms offering payments and lending services has further accelerated the convergence of commerce and finance. The challenge for policymakers is no longer simply whether banking and commerce should interact, but whether existing legal and supervisory frameworks remain capable of governing increasingly integrated financial ecosystems.
The original rationale for structural separation depended heavily on localized banking markets characterized by limited competition. Throughout much of the 19th and early 20th centuries, restrictions on branching, interstate banking, and mergers fragmented financial markets and often left communities served by only a handful of institutions. In such environments, control over credit could translate directly into local economic power. Policymakers therefore frequently viewed institutional size itself as inherently suspect.
At the same time, views about competition policy were changing. Just as economists increasingly criticized anticompetitive regulation as a drag on economic growth, they also challenged traditional antitrust assumptions that equated market concentration with reduced competition.[90] Earlier approaches to antitrust and banking regulation shared a common objective: preserving competition by preserving competitors. Both often favored large numbers of small firms and viewed consolidation with suspicion.[91]
By the 1970s and 1980s, however, a growing body of empirical research found only a limited relationship between market structure and competitive outcomes. Economists increasingly recognized that firms often gained market share not through anticompetitive conduct, but by innovating and offering consumers better products at lower prices. In many industries, larger firms generated substantial efficiencies that benefited consumers through lower costs, improved quality, and expanded output.
Scholars also increasingly recognized that complex systems of regulation and antitrust enforcement could empower organized interest groups rather than consumers. Rather than protecting competition, regulatory barriers often protected incumbent firms from competitive pressure.
These developments influenced banking policy. Restrictions on branching and interstate banking increasingly came to be viewed as barriers to competition that preserved local monopolies and raised costs for consumers. Larger banking organizations could exploit economies of scale, diversify risks across broader geographic markets, and invest in technologies that smaller institutions often could not afford.[92]
Interstate banking ultimately transformed the competitive landscape. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permitted banks to operate across state lines and accelerated nationwide competition among financial institutions.[93] Although the legislation contributed to consolidation, it also increased competitive pressure by allowing banks to enter markets previously protected by geographic barriers.[94]
As interstate banking expanded, consumers and businesses increasingly gained access to financial services beyond their local communities.[95] National institutions frequently challenged entrenched regional monopolies by introducing broader product offerings, lower transaction costs, and new sources of capital. The relationship between size and market power became more complicated than earlier policymakers had assumed. In many cases, technological scale increased competition by enabling firms to serve broader markets and compete against locally entrenched institutions.
The rise of fintech firms further accelerated this transformation. Many fintech lenders use digital distribution channels, alternative underwriting models, real-time data analytics, and lower-cost operating structures to serve consumers and small businesses historically underserved by traditional financial institutions. In many rural communities and lower-income urban areas, traditional banks reduced branch presence, tightened underwriting standards, or exited certain markets altogether due to profitability constraints and rising compliance costs.[96] Fintech firms increasingly filled portions of that gap.
These developments suggest that technological scale and platform-based financial intermediation can, in some circumstances, expand competition and increase access to financial services rather than diminish them. Digital lenders can originate loans nationally without maintaining expensive branch networks, while alternative underwriting models based on cash-flow data, payroll information, transaction histories, and other nontraditional indicators may allow firms to serve borrowers overlooked by conventional credit-scoring systems.
None of this eliminates concerns about concentration of economic power. It changes the form those concerns take. Earlier policymakers worried about geographically dominant banks controlling local credit markets. Modern concerns increasingly focus on platform dominance, control over financial and behavioral data, network effects, and the ability of large technology ecosystems to intermediate both commerce and finance simultaneously.
The modern challenge is therefore not determining whether scale is inherently good or bad. It is determining when scale promotes competition, innovation, and financial inclusion, and when it instead facilitates exclusionary conduct, dependency, or excessive concentrations of informational and economic power.
By the 1970s and through the 1990s, inflation, globalization, technological innovation, and the growth of capital markets placed increasing pressure on the segmented financial system established by Glass-Steagall. Financial institutions argued that strict separation among commercial banking, investment banking, and insurance placed American firms at a competitive disadvantage relative to universal banks operating in Europe and Asia.[97]
At the same time, financial innovation transformed the traditional role of banks. Large corporations increasingly obtained funding directly through securities markets rather than relying on bank loans. Securitization, derivatives, and institutional investment reduced the dominance of traditional deposit-based intermediation.[98] As these developments accelerated, banks increasingly sought to expand into underwriting, insurance, asset management, and other fee-based businesses, creating growing tension between existing regulatory structures and evolving market realities.
The culmination of these pressures came with the Gramm-Leach-Bliley Act of 1999.[99] The legislation relaxed longstanding restrictions on affiliations among commercial banks, securities firms, and insurance companies, effectively dismantling core components of Glass-Steagall’s separation framework. Although Gramm-Leach-Bliley preserved the formal distinction between banking and general commerce, it reflected a broader shift away from rigid structural barriers and toward functional supervision, risk management, and consolidated oversight.
The legislation reflected a growing consensus that financial integration could generate efficiencies, improve international competitiveness, and better align regulation with modern market realities. By the end of the 20th century, policymakers increasingly viewed many New Deal-era restrictions as impediments to innovation rather than essential safeguards against instability.
Recent developments in digital assets and stablecoins suggest how a similar approach might apply to the banking-and-commerce debate. The GENIUS Act, which President Donald Trump signed into law in July 2025, generally requires stablecoin activities to be conducted through separately capitalized subsidiaries supported by dedicated reserves.[100] This approach seeks to isolate risks to the banking system while still allowing consumers to access new products through established financial institutions.[101]
That model offers a potential framework for expanding permissible banking activities more broadly. Consumers interested in stablecoins or other digital assets may prefer obtaining them through existing banking relationships rather than navigating unfamiliar platforms. At the same time, conducting those activities through separately regulated subsidiaries can protect insured deposits and limit risks to the FDIC insurance fund.
More broadly, the GENIUS Act reflects a regulatory philosophy that seeks to manage risks through targeted safeguards rather than categorical prohibitions. Rather than preventing integration altogether, policymakers can require organizational structures, capital protections, and supervisory controls that isolate risks while preserving the benefits of innovation and consumer choice.
One of the clearest illustrations of the erosion of traditional banking-and-commerce barriers is the rise of industrial loan companies. Although ILCs originated as specialized institutions designed to extend credit to industrial workers, they gradually evolved into one of the most significant exceptions to the separation framework.
Under federal law, qualifying parent companies that own industrial loan companies are generally exempt from key provisions of the BHCA. As a result, commercial firms owning industrial loan companies are not treated as bank holding companies and therefore avoid consolidated Federal Reserve supervision and many of the restrictions ordinarily imposed on commercial ownership of insured depository institutions.[102]
This exemption has allowed major commercial and technology firms to gain access to the federal banking system without fully entering the traditional bank-regulatory framework. Automobile manufacturers such as BMW, Toyota, and General Motors have used industrial-loan-company charters to support captive-finance operations.[103] More recently, technology and fintech firms, including Block and Rakuten, have pursued industrial-loan-company charters to facilitate integrated payment, lending, and platform-based financial services.[104]
Walmart’s attempt to obtain an industrial-loan-company charter during the mid-2000s became a focal point in the broader debate. Critics warned that permitting a major retailer to own an insured depository institution would undermine the traditional separation of banking and commerce. Supporters countered that Walmart’s entry could increase competition and expand access to lower-cost financial services.[105]
The industrial-loan-company experience highlights both the potential benefits and the practical realities of integration. Captive-finance institutions often possess substantial informational advantages regarding the products they finance and the customers they serve. Automobile manufacturers, for example, may have better information about resale values, maintenance costs, and borrower behavior than traditional lenders. These advantages can translate into lower borrowing costs and more efficient underwriting for consumers.
Consumers also benefit from one-stop shopping and integrated offerings that combine financing, warranties, insurance, and related services. Such arrangements can reduce transaction costs, improve convenience, and create opportunities for more tailored products.
Perhaps most importantly, the historical performance of commercially owned industrial loan companies challenges many traditional assumptions about the dangers of combining banking and commerce.[106] Despite decades of concern that commercial ownership would threaten safety and soundness, no commercially owned ILC has ever failed in a manner that imposed losses on the FDIC insurance fund.[107] On average, industrial loan companies have generally maintained stronger capital positions and higher profitability than many traditional banks.[108]
As Mehrsa Baradaran observed shortly after the 2008 financial crisis, “it is… probable that if Wal-Mart had opened a bank in 2005, its bank today would be one of the safest in the country. In contrast to small and large traditional banks that failed by the hundreds, a bank backed by the retail behemoth would most likely have thrived.”[109]
The broader lesson of the ILC experience is that structural restrictions often prove easier to circumvent than to enforce. Even when statutes seek to maintain a formal separation between banking and commerce, firms frequently respond by adopting organizational structures that replicate many of the same economic relationships while avoiding the full application of bank-holding-company regulation.
As a result, many commercial and technology platforms now participate extensively in financial services through charter ownership, embedded-finance arrangements, payments ecosystems, and bank partnerships. The practical question is no longer whether commerce and finance can be integrated. It is whether existing regulatory frameworks are designed to supervise that integration effectively.
Technological innovation has accelerated the convergence of commerce and finance through embedded finance and platform-based ecosystems. Consumers increasingly access payments, lending, savings, and financial-management tools directly through e-commerce platforms, software applications, and digital marketplaces rather than through traditional banks.
These developments create significant opportunities for consumers. Integrating financial services into existing commercial platforms can increase convenience, reduce transaction costs, improve product customization, and strengthen competition. Consumers increasingly value seamless experiences that combine shopping, payments, credit, rewards programs, and financial management within a single platform.
The benefits extend beyond convenience. Financial and commercial integration can improve fraud detection, enhance risk management, and enable more personalized products and services. Information about purchasing patterns, payment behavior, and consumer preferences can help firms better identify suspicious transactions, tailor products to individual consumers, and reduce operational costs.
These efficiencies are not merely theoretical. Consumers already experience many of them through integrated payment systems, retailer-issued credit products, digital wallets, loyalty programs, and platform-based financial services. Embedded finance represents a natural extension of those existing trends.
At the same time, integration creates new regulatory challenges. Critics argue that combining commercial and financial activities may allow firms to accumulate unprecedented amounts of consumer information. Platform operators may be able to combine transaction data, purchasing histories, location information, online activity, communications, and other behavioral information to develop highly detailed consumer profiles.[110]
Some observers worry that these capabilities could facilitate unfair discrimination, exclusionary conduct, or highly individualized pricing practices sometimes described as “surveillance pricing.” Others raise concerns about platform dominance, data concentration, and the potential for large firms to leverage financial services to reinforce market power in adjacent markets.
These concerns deserve serious attention. Yet they differ substantially from the concerns that originally motivated the separation of banking and commerce. Earlier policymakers worried primarily about local credit monopolies, interlocking directorates, and the concentration of industrial and financial power. Today’s concerns center on data governance, privacy, platform economics, and digital market power.
To the extent these risks materialize, they can often be addressed more effectively through targeted enforcement of competition law, consumer-protection law, privacy rules, and prudential regulation than through categorical prohibitions on integration. The costs of broad structural restrictions are increasingly difficult to justify when less restrictive alternatives are available.[111]
As George Benston argued in criticizing the Bank Holding Company Act framework, absent evidence of coercion or monopolistic tying, a “consumer cannot be made worse off by having an opportunity to purchase things together.”[112] Whether one ultimately agrees with that conclusion, it reflects a broader shift in regulatory thinking away from prohibiting integration outright and toward addressing specific harms directly.
Banking-as-a-service (BaaS) arrangements represent perhaps the clearest example of the growing disconnect between formal legal categories and economic reality. Under these arrangements, regulated banks provide charters, compliance infrastructure, payment-system access, and balance-sheet capacity, while fintech firms manage product design, branding, customer acquisition, and user experience.[113]
From the consumer’s perspective, the fintech platform often appears to be the primary provider of financial services. Legally, however, the underlying banking functions remain housed within a regulated bank. The result is a form of functional integration that resembles many of the economic relationships historically associated with banking and commerce, even though ownership-based restrictions technically remain intact.
Rather than obtaining bank charters and becoming subject to comprehensive prudential supervision, fintech firms increasingly partner with regulated banks while retaining substantial influence over customer relationships, product design, and economic value creation. These arrangements allow firms to participate extensively in financial services without becoming banks in the traditional sense.
As a result, the risks associated with banking-commerce integration are not eliminated. They are simply reorganized through contractual relationships rather than common ownership. The economic substance of integration remains, even when the legal form differs.
This dynamic highlights a broader challenge confronting modern financial regulation. Statutory frameworks built around institutional form increasingly struggle to govern financial systems characterized by functional integration, platform economics, data-driven services, and technological interdependence. The law often regulates entities based on what they are formally classified as rather than what they actually do.
The growth of banking-as-a-service arrangements also illustrates an important asymmetry in the current regulatory framework. Nonbank firms can increasingly combine commercial activities and financial services through partnerships, platforms, and contractual relationships. Banks, by contrast, remain subject to significant restrictions on their ability to engage directly in many commercial activities.
The result is a one-way integration model. Commerce increasingly enters banking, while banking remains constrained in its ability to enter commerce. This asymmetry raises difficult questions about competitive neutrality, consumer welfare, and regulatory coherence. If policymakers conclude that integrated financial ecosystems pose unacceptable risks, then many contemporary business models would appear difficult to justify. If, instead, those risks can be managed through supervision, capital requirements, activity restrictions, affiliate-transaction rules, and other safeguards, then the rationale for maintaining broad structural prohibitions becomes increasingly difficult to sustain.
The emergence of banking-as-a-service, embedded finance, platform ecosystems, and fintech partnerships therefore suggests that the central policy question has changed. The issue is no longer whether banking and commerce should interact. They already do. The question is how best to govern that interaction in a manner that promotes competition, innovation, consumer welfare, and financial stability while addressing the specific risks that integration may create.
Many of the original rationales for separating banking and commerce reflected legitimate historical concerns rooted in the economic and institutional realities of the 19th and early 20th centuries. Policymakers faced a fragmented banking system marked by localized monopolies, limited competition, high government-created entry barriers, weak prudential oversight, recurring financial panics, and widespread distrust of concentrated economic power. In that environment, combining control over credit with commercial enterprises raised real risks. Banks that dominated local markets could direct credit toward affiliates, suppress competitors, distort capital allocation, and extend the influence of powerful industrial or financial interests across regional economies. Structural separation therefore emerged not merely as a technical banking rule, but as part of a broader political and economic effort to preserve decentralized markets, protect democratic governance, and limit excessive concentrations of private power.
Banking regulation serves four core purposes: financial stability, protection of the Federal Deposit Insurance Fund, consumer protection, and competition.[114] As discussed above, the historical separation of banking and commerce was justified as necessary to promote financial stability, protect the deposit-insurance fund, and prevent banks from using legal privileges to gain competitive advantages over rivals. But modern regulatory sophistication—enabled in part by emerging technology—points toward allowing greater opportunities for banks to engage in commercial activities, and vice versa, without sacrificing stability. Indeed, greater integration may enhance stability in some circumstances.
Earlier regulatory frameworks operated in an era with comparatively limited supervisory tools and less sophisticated approaches to risk management. Policymakers lacked many of the mechanisms now available to monitor and constrain financial institutions, including consolidated supervision, risk-based capital standards, stress testing, liquidity requirements, affiliate-transaction restrictions, advanced data analytics, and near real-time supervisory reporting. Structural restrictions therefore functioned, in part, as a proxy for supervisory capacity.
Rather than promote competition through rigorous supervision, regulators protected incumbents from competition to preserve stability. Although that approach arguably sustained stability for a significant period, it came at a high cost: higher prices, limited services, exclusion of many Americans from the financial system, and an anticompetitive environment conducive to invidious discrimination.[115] In short, by prioritizing stability through limits on competition, the system served bankers more than consumers or the broader American economy. When regulators lacked the ability to continuously monitor complex financial activity, prohibiting certain forms of integration altogether offered a simpler, more administrable means of containing risk and limiting conflicts of interest.
Technological innovation, evolving competition policy, and changes in financial-market structure have altered many of the assumptions underlying those earlier restrictions. Interstate banking reduced the geographic isolation of local banking markets, while digital financial platforms expanded access to credit beyond traditional branch networks. Consumers and businesses increasingly obtain financial services from a wide range of providers, including fintech firms, payment platforms, private-credit markets, and embedded-finance ecosystems operating across state and national boundaries. As a result, institutional scale no longer necessarily correlates with the localized market dominance that originally concerned policymakers.
Modern competition policy has also moved well beyond the Brandeisian structural assumptions that shaped earlier thinking about banking and other markets. Earlier policymakers often viewed concentration itself as inherently harmful, even absent direct evidence of consumer harm or exclusionary conduct. Contemporary antitrust analysis, by contrast, places greater weight on measurable competitive effects, consumer welfare, prices, innovation, and barriers to entry. In some contexts, larger financial and technological platforms may increase competition by lowering transaction costs, expanding access to underserved markets, and introducing new products or distribution models that smaller institutions cannot efficiently provide.
These developments suggest that policymakers should not evaluate separation as a binary question of whether banking and commerce must remain entirely divided. Instead, they should reassess the historical rationales for separation individually in light of modern market structure, supervisory capabilities, technological integration, and global competition. Some concerns that originally justified structural separation remain relevant, particularly those involving systemic risk, conflicts of interest, and concentrated economic power. Others, however, may be mitigated through modern prudential regulation, diversified financial markets, and changes in how financial services are delivered. The following sections examine how contemporary economic and technological conditions affect several of the principal historical justifications for maintaining strict separation between banking and commerce.
Most advanced economies permit significantly greater integration between banking and commerce than the United States.[116] Universal-banking systems in Europe and Asia allow financial institutions to maintain closer relationships with commercial enterprises while relying on prudential supervision and conduct regulation to manage associated risks. After reviewing the evidence comparing the traditional U.S. system with foreign universal-banking systems, George Benston concluded that universal banking produced significant benefits for consumers and the economy, with few offsetting costs.[117] Overall, he found that allowing banks to diversify their operations reduced, rather than increased, financial-system risk. U.S. experience confirmed that finding: Bank failures during the Great Depression were not caused or worsened by securities activities. Indeed, commercial banks with securities departments or affiliates had significantly lower failure rates than more-specialized banks.
By holding both equity and debt in firms, universal banks may also monitor firm management more effectively. For example, an equity stake may allow a bank to obtain a board seat and gain better insight into a firm’s operations. Universal banks may also be better positioned to resolve conflicts between debt and equity holders during a workout. Moreover, despite the dramatic claims about fascism during the passage of the Bank Holding Company Act, Benston found no evidence that universal banks were more likely than other interests to exert undue political influence, engage in anticompetitive conduct, or otherwise harm consumers. The experience of other countries therefore suggests that greater integration of commerce and finance can produce more efficient and stable economic systems than the traditional U.S. model.
In today’s global economy, capital is mobile and the costs of inefficient regulation are high. That reality has helped drive pressure on U.S. regulators. To be sure, the large number of smaller banks in the United States may limit how much policymakers can infer from foreign experience with universal banking. Commercial enterprises have historically been riskier and more volatile than banks, and smaller banks may be less able than larger, centralized institutions to absorb individual business shocks or broader market-wide disruptions. On the other hand, the failure of smaller banks will generally have more modest effects on overall financial stability and the deposit-insurance fund. And, as Benston notes, while offering services outside the traditional business of banking could increase risk, it could also create diversification opportunities that reduce risk.
Modern prudential regulation is also significantly more sophisticated than earlier regulatory regimes. Congress and the executive branch can further modernize prudential oversight by investing in infrastructure that supports risk-based supervision, including more frequent data collection through application programming interface (API) calls and artificial-intelligence tools that can flag risks not captured by rules-based regulation or ordinary compliance-management systems. Policymakers could also maintain principles-based limits on industry, sector, or overall commercial exposure to blunt the effects of volatility while permitting greater integration.
Another traditional rationale for separation was to protect insured depository institutions from commercial risk. Policymakers feared that combining banking and commerce would expose the public safety net to volatile commercial activities. But capital requirements, liquidity rules, stress testing, affiliate-transaction restrictions, and supervisory oversight now give regulators tools to manage many forms of integrated risk without relying on an inefficient prophylactic rule.
Indeed, excessive structural limits may create their own vulnerabilities by reducing diversification opportunities. Restricting banks to a narrow set of highly correlated financial activities may increase, rather than reduce, systemic fragility—especially as nonbank finance and decentralized finance continue to reshape the financial system in ways that may further disadvantage traditional banks. By contrast, allowing banks to hold broader interests could diversify their operations and provide useful information about firms and industries, helping banks avoid bad loans and manage risk more effectively.
Regulators could also mitigate risk by requiring nonbank activities to be conducted through a separate subsidiary. That structure would help prevent commercial risks from spreading to the insured depository institution and protect the deposit-insurance fund from losses tied to affiliated commercial enterprises. The GENIUS Act offers a useful analogy by requiring stablecoin operations to be conducted through a separate subsidiary.
Historically, policymakers feared that banks controlling commercial enterprises could use government privileges and market power to deny credit to competitors or favor affiliated firms. In highly localized banking markets with limited competition, those concerns were legitimate, if sometimes overstated.[118]
Today, financial markets are far more competitive and diversified. Few commercial enterprises depend on only one or two local banks for financing. Consumers and businesses can often obtain credit from multiple sources, including banks, fintech lenders, private-credit firms, and capital markets. Modern antitrust law also focuses increasingly on conduct rather than structure alone,[119] while prudential supervision gives regulators tools to prevent improper subsidization or discriminatory treatment.
In the current competitive environment, only a handful of very large financial institutions raise even a theoretical possibility of improperly leveraging market power. The vast majority of smaller institutions raise no similar concern. Likewise, the idea that commercial firms could exercise meaningful market power over finance is far less plausible in a market with extensive online options and competition from established bank branches.
Rather than prohibit integration categorically, policymakers could achieve better outcomes by targeting specific anticompetitive conduct, including self-preferencing, discriminatory pricing, and exclusionary platform practices.
The persistence of embedded finance and platform-based intermediation demonstrates the limits of structural regulation in modern markets. The economic incentives for integration remain powerful. When legal restrictions prohibit integration within firms, market participants often recreate functionally similar arrangements through partnerships, contracts, or technological intermediaries.
That workaround dynamic suggests structural separation may no longer effectively constrain integration. Instead, it may simply displace integration into indirect, less transparent arrangements that create different forms of systemic risk. Behavior-based rules and supervisory guidance can better calibrate the permissible level of integration while still serving policymakers’ core objectives.
The erosion of structural separation suggests that modern financial regulation should focus less on categorical institutional boundaries and more on the conduct and risks that integrated financial ecosystems create. The point is not to abandon the traditional goals of banking regulation—financial stability, protection of the deposit-insurance fund, consumer protection, and competition—but to pursue them through rules better suited to modern markets.
Rather than prohibit integration outright or draw arbitrary lines around permissible ownership percentages, policymakers should target the specific conduct that threatens competition, consumer welfare, or systemic stability. That includes rules against anticompetitive self-preferencing, transparency requirements, interoperability standards, and limits on discriminatory pricing practices.
An activity-based approach would better reflect how modern finance actually operates. Financial services increasingly move through platforms, partnerships, embedded-finance arrangements, and contractual networks that do not always fit neatly within legacy institutional categories. Rules that follow the activity—and the risk—would be more durable than rules that depend on formal corporate boundaries.
More broadly, Congress should consider whether the binary separation embodied in the Bank Holding Company Act of 1956 remains the most effective framework for managing bank-commerce risks. Rather than prohibit all commercial activity by banking organizations—and absent a broader transition to a purely activity-based regulatory model—Congress could amend Section 4(k) to permit de minimis commercial activities subject to quantitative limits, enhanced disclosure requirements, and ongoing supervisory oversight.[120]
Recent legislative proposals governing digital assets offer a useful model. They permit limited nonfinancial activities connected to digital-asset operations while preserving core prudential safeguards. A similar approach to bank-commerce integration would maintain the principle of separation while creating narrowly tailored flexibility for innovation, customer convenience, and operational efficiency.
If Congress adopted such a framework, Sections 23A and 23B of the Federal Reserve Act and their implementing regulations under Regulation W should serve as the primary prudential safeguards governing interactions between insured depository institutions and commercial affiliates.[121] Policymakers could modernize Regulation W by expanding the scope of covered transactions, applying arm’s-length requirements to functionally equivalent platform-finance arrangements, establishing tailored exposure criteria or limits for commercial affiliates, and creating safeguards for data sharing and preferential treatment.
Together, these reforms would allow limited commercial integration while preserving the longstanding objective of insulating insured banks from conflicts of interest, excessive risk concentrations, and inappropriate transfers of the federal safety-net subsidy to commercial enterprises.
Modern platform ecosystems increasingly rely on network effects and closed-loop systems that can limit competition and consumer choice. Regulatory policy should therefore encourage interoperability, data portability, and consumer mobility to prevent digital ecosystems from creating modern forms of economic lock-in.[122]
Interoperability can serve as a nonstructural remedy for competition problems that once might have prompted structural limits. Rather than prohibit integration categorically, policymakers can require integrated platforms to preserve meaningful exit options, reduce switching costs, and prevent dominant firms from using closed systems to entrench their position.
The integration of commerce and finance creates unprecedented opportunities for data aggregation and behavioral profiling. Firms operating across multiple economic domains may use financial and commercial data together to shape prices, target offers, or infer consumer preferences.
That development creates substantial opportunities for consumer benefit, but also new risks of consumer harm. Policymakers should therefore develop governance frameworks that encourage efficient and productive uses of consumer data while addressing misuse. An effective framework should focus less on abstract questions of who “owns” data and more on how firms use consumer information, when those uses are permissible, and what safeguards should apply.[123] Much as “anti-truck” or wage-payment laws prevented employers from locking workers into closed economic arrangements, modern data-governance rules can prevent platforms from using information control to lock consumers into financial ecosystems.
As agentic artificial-intelligence tools become common in consumer finance, policymakers should also monitor whether fiduciary or fiduciary-like standards are needed, and how those standards should be defined, tested, and enforced. As more advanced technologies—including quantum computing—reach consumer financial markets, debates over digital public infrastructure will become increasingly relevant.[124]
Any modern framework must recognize the diversity of institutions operating within the financial system. Community banks, regional banks, fintech firms, and global systemically important institutions pose fundamentally different levels and types of risk.
A principles-based framework should therefore rely on proportional regulation calibrated to an institution’s scale, complexity, and systemic significance. Uniform structural prohibitions across all firms risk overregulating smaller institutions, underregulating novel risk channels, and entrenching incumbents that can more easily absorb compliance costs.
Financial innovation has generated substantial consumer benefits, including lower transaction costs, expanded access to financial services, and greater convenience. Policymakers should avoid regulatory approaches that unnecessarily suppress innovation or entrench incumbent institutions.
The objective should not be to prevent integration entirely. It should be to ensure that integrated financial ecosystems operate within a framework that preserves competition, transparency, interoperability, consumer choice, and systemic stability.
The separation of banking and commerce emerged from a distinct historical environment marked by fragmented banking markets, industrial consolidation, limited competition, and deep political distrust of concentrated economic power. In that context, structural separation responded to legitimate concerns about financial stability, market power, and democratic governance.
Technological innovation and evolving market structures have since altered the assumptions underlying those restrictions. Interstate banking increased competition among financial institutions. Embedded finance blurred the distinction between financial and commercial activity. Platform ecosystems now integrate payments, lending, commerce, and data within unified digital environments.
Today, the boundary between banking and commerce has already eroded in functional terms, even where formal legal restrictions remain. Modern financial regulation therefore faces a choice: Policymakers can continue relying on 20th-century structural categories increasingly disconnected from economic reality, or they can adopt a more flexible, principles-based framework focused on conduct, competition, consumer welfare, and systemic risk.
The central challenge is no longer simply preventing banks from entering commerce. It is ensuring that firms exercising bank-like power through digital ecosystems operate under rules that preserve competition, transparency, consumer protection, and systemic stability. The future of banking regulation will depend less on maintaining rigid institutional boundaries than on governing integrated financial ecosystems in a technologically dynamic economy.
[1] Jonathan R. Macey, Geoffrey P. Miller, Richard S. Carnell & Julie Andersen Hill, Banking Law and Regulation (6th ed. 2021); see also Bd. of Governors of the Fed. Reserve Sys., The Federal Safety Net: Banking Reform and Financial Modernization (2003).
[2] Bernard Bailyn, The Ideological Origins of the American Revolution (1967); Gordon S. Wood, The Radicalism of the American Revolution (1993).
[3] McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819); President Andrew Jackson, Veto Message Regarding the Bank of the United States (July 10, 1832), reprinted in 2 Messages and Papers of the Presidents 576 (James D. Richardson ed., 1897) [hereinafter Jackson Veto Message].
[4] Fed. Reserve Bank of Kan. City, Perspectives on 150 Years of Dual Banking (2012).
[5] Fed. Deposit Ins. Corp., 2020 FDIC Community Banking Study (2020).
[6] U.S. Gov’t Accountability Off., GAO-09-216, Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System (2009); see also U.S. Gov’t Accountability Off., GAO-16-175, Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness (2016).
[7] Cong. Rsch. Serv., R44918, Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework (2023).
[8] Mark A. Carlson & David C. Wheelock, Branch Banking, Bank Competition, and Financial Stability, 100 Fed. Rsrv. Bank St. Louis Rev. 191 (2018).
[9] Writing in 1977, Arnold Heggestad and John Mingo concluded that nearly every U.S. banking market exhibited “effective monopoly” conditions that raised consumer prices, despite the presence of thousands of banks nationwide. Arnold A. Heggestad & John J. Mingo, The Competitive Condition of U.S. Banking Markets and the Impact of Structural Reform, 32 J. Fin. 649 (1977).
[10] U.S. House of Representatives, Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit, H.R. Rep. No. 1593, 62d Cong., 3d Sess. (1913).
[11] Off. of the Comptroller of the Currency, U.S. Dep’t of the Treasury, Financial Technology, https://www.occ.gov/topics/supervision-and-examination/financial-technology/index-financial-technology.html.
[12] Alejandro DePetris, Asheet Iqbal, Chandler Moulton & Marie-Claude Nadeau, What the Embedded-Finance and Banking-as-a-Service Trends Mean for Financial Services, McKinsey & Co. (Mar. 1, 2021).
[13] 12 U.S.C. § 1813(c)(2).
[14] Exec. Order No. 14,405, Integrating Financial Technology Innovation Into Regulatory Frameworks, 91 Fed. Reg. 30,475 (May 22, 2026).
[15] Steve Cocheo, Will the GENIUS Act Revolutionize Banking and Payments? Absolutely. Here’s How, The Fin. Brand (Aug. 12, 2025), https://thefinancialbrand.com/news/payments-trends/new-stablecoin-law-changes-financial-landscape-and-gives-u-s-a-jump-on-europe-191585.
[16] Dan Awrey, The Puzzle of Financial Regulation, in The Oxford Handbook of Financial Regulation 23 (Niamh Moloney, Eilís Ferran & Jennifer Payne eds., 2019).
[17] Arthur E. Wilmarth Jr., Taming the Megabanks: Why We Need a New Glass-Steagall Act (2020).
[18] Bernard Shull, The Separation of Banking and Commerce: Origin, Development, and Implications for Antitrust, 28 Antitrust Bull. 255 (1983).
[19] Jamie Grischkan, Banking and the Antimonopoly Tradition: The Long Road to the Bank Holding Company Act, in Antimonopoly and American Democracy 204, 205 (Daniel A. Crane & William J. Novak eds., 2024).
[20] See Jackson Veto Message, supra note 3.
[21] Andrew Jackson, Veto Message Regarding the Bank of the United States (July 10, 1832), reprinted in The American Presidency Project (Gerhard Peters & John T. Woolley eds., 2023), https://www.presidency.ucsb.edu/node/200893.
[22] During the 19th century, states adopted general incorporation statutes for most corporations, replacing the traditional requirement that legislatures grant special charters. See Henry N. Butler, Nineteenth-Century Jurisdictional Competition in the Granting of Corporate Privileges, 14 J. Legal Stud. 129 (1985). Banks generally remained an exception. National banks are also unusual because they are chartered entirely under federal law and lack a state of incorporation.
[23] Charles W. Calomiris & Stephen H. Haber, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (2014).
[24] Eugene N. White, The Regulation and Reform of the American Banking System, 1900–1929 (1983).
[25] Price V. Fishback, Did Coal Miners “Owe Their Souls to the Company Store”? Theory and Evidence from the Early 1900s, 46 J. Econ. Hist. 1011 (1986).
[26] National Bank Act, ch. 106, 13 Stat. 99 (1864) (codified as amended at 12 U.S.C. §§ 21–216d).
[27] Jane E. Knodell, The Second Bank of the United States: ‘Central’ Banker in an Era of Nation Building, 1816–1836 (2017).
[28] Fed. Reserve Bank of Phila., The National Banking Acts, Fed. Reserve Hist. (2024).
[29] Off. of the Comptroller of the Currency, U.S. Dep’t of the Treasury, History of the OCC & the National Banking System, https://www.occ.gov/about/who-we-are/history/index-history.html.
[30] Internal Revenue Act of 1866, ch. 184, § 9, 14 Stat. 98, 146. The Supreme Court upheld the tax in Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869).
[31] Jamie Grischkan, Regulating Bank Mergers: Past and Present, 2024 U. Ill. L. Rev. 557, 563 (quoting Morris Ketchum, The National Banking Law—Opinion of the New Comptroller, N.Y. Times (May 21, 1863)).
[32] Id. at 564; see also id. (“The American banking system thus fostered local bank monopolies in order to prevent the domination of financial resources by massive bank conglomerates.”).
[33] Id. at 565.
[34] Todd J. Zywicki, Looking Forward by Looking Backward: The Future of Consumer Finance and Financial Protection, 19 J.L. Econ. & Pol’y 223 (2024).
[35] Louis D. Brandeis, Other People’s Money and How the Bankers Use It 5–6 (1914). Brandeis argued that investment banks had expanded beyond their traditional role of issuing stocks, bonds, and notes to exercise control over railroad and industrial management, insurance companies, consumer banking, and commercial banks and trusts.
[36] Fed. Reserve Bank of St. Louis, The Panic of 1907, Fed. Reserve Hist., https://www.federalreservehistory.org/essays/panic-of-1907.
[37] Jon R. Moen & Ellis W. Tallman, The Bank Panic of 1907: The Role of Trust Companies, 52 J. Econ. Hist. 611 (1992).
[38] Money Trust Investigation: Investigation of Financial and Monetary Conditions in the United States Under House Resolutions Nos. 429 and 504 Before a Subcomm. of the H. Comm. on Banking and Currency, 62d Cong., 3d Sess. (1913).
[39] Thomas K. McCraw, Prophets of Regulation (1984).
[40] Stanley M. Gorinson, Depository Institution Regulatory Reform in the 1980s: The Issue of Geographic Restrictions, 28 Antitrust Bull. 227, 238 (1983).
[41] Stock Exchange Practices: Hearings Before the S. Comm. on Banking and Currency Pursuant to S. Res. 84, 73d Cong., 1st & 2d Sess. (1933–1934).
[42] Randall S. Kroszner & Raghuram G. Rajan, Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking Before 1933, 84 Am. Econ. Rev. 810 (1994).
[43] George J. Benston, The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered (1990).
[44] Banking Act of 1933, Pub. L. No. 73-66, 48 Stat. 162.
[45] Fed. Deposit Ins. Corp., The First Fifty Years: A History of the FDIC, 1933–1983 (1984).
[46] This competitive advantage is even greater for banks considered “too big to fail,” which benefit from an implicit government subsidy. See Int’l Monetary Fund, IMF Survey: Big Banks Benefit From Government Subsidy (Mar. 31, 2014), https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol033114a.
[47] Prevailing economic theory held that permitting banks to pay interest on deposits would trigger “ruinous competition,” as banks competed for deposits by offering ever-higher rates. To cover those obligations, banks would allegedly need to pursue riskier, higher-yield investments, threatening financial stability. Banks that declined to participate would lose deposits to competitors. Regulation Q therefore capped the interest banks could pay on deposit accounts. Unable to compete on yield, banks famously attracted customers with giveaways such as free toasters and other household appliances.
[48] Ann Fleming, Anti-Competition Regulation, 93 Bus. Hist. Rev. 701, 713–14 (2019).
[49] Todd J. Zywicki, Restoring the Rule of Law in Finance, Heritage Found. First Principles No. 92 (June 2023); see also Eugene N. White, Lessons from the History of Bank Examination and Supervision in the United States, 1863–2008, in Financial Market Regulation in the Wake of Financial Crises: The Historical Experience 25 (Alfredo Gigliobianco & Gianni Toniolo eds., 2009).
[50] Prasad Krishnamurthy, George Stigler on His Head: The Consequences of Restrictions on Competition in (Bank) Regulation, 35 Yale J. on Regul. 823, 837 (2018).
[51] President Franklin D. Roosevelt, Message to Congress on Curbing Monopolies (Apr. 29, 1938).
[52] Id.
[53] Id.
[54] Sponsors of the legislation also invoked the threat of fascism, arguing that close, interlocking relationships among large corporations, banks, and government could undermine democratic governance. See Grischkan, Banking and the Antimonopoly Tradition, supra note 19, at 205.
[55] Grischkan, Regulating Bank Mergers, supra note 31, at 569–77.
[56] Thomas E. Wilson, Separation Between Banking and Commerce Under the Bank Holding Company Act—A Statutory Objective Under Attack, 33 Cath. U. L. Rev. 163, 166 (1983).
[57] Saule T. Omarova & Margaret E. Tahyar, That Which We Call a Bank: Revisiting the History of Bank Holding Company Regulation in the United States, 31 Rev. Banking & Fin. L. 113 (2011–2012).
[58] Mehrsa Baradaran, Reconsidering the Separation of Banking and Commerce, 80 Geo. Wash. L. Rev. 385 (2012); see also George J. Benston, Universal Banking, 8 J. Econ. Persps. 121 (1994).
[59] S. Rep. No. 89-1179, at 7 (1966).
[60] Zywicki, Looking Forward by Looking Backward, supra note 34.
[61] Gorinson, supra note 40, at 236.
[62] Gorinson, supra note 40, at 237.
[63] Todd J. Zywicki, The Law and Political Economy Project: A Critical Analysis, 20 J.L., Econ. & Pol’y 1 (2025).
[64] Id.
[65] Fed. Deposit Ins. Corp., History of the Eighties: Lessons for the Future, Vol. 1—An Examination of the Banking Crises of the 1980s and Early 1990s (1997); see also Fed. Reserve Bank of St. Louis, Depository Institutions Deregulation and Monetary Control Act of 1980, Fed. Reserve Hist., https://www.federalreservehistory.org/essays/monetary-control-act-of-1980.
[66] Shull, supra note 18, at 275.
[67] Saule T. Omarova & Graham Steele, Banking and Antitrust, 133 Yale L. J. 1162 (2024).
[68] Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself (1978).
[69] Craig M. Newmark, Price-Concentration Studies: There You Go Again (Feb. 14, 2004), https://ssrn.com/abstract=503522.
[70] George J. Stigler, The Theory of Economic Regulation, 2 Bell J. Econ. & Mgmt. Sci. 3 (1971).
[71] Jith Jayaratne & Philip E. Strahan, Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking, 41 J.L. & Econ. 239 (1998), https://doi.org/10.1086/467390.
[72] Omarova & Tahyar, supra note 57, at 138–57.
[73] Id. at 158–88.
[74] Todd J. Zywicki, The Economics of Credit Cards, 3 Chapman L. Rev. 79 (2000); see also Margaret L. Olney, Buy Now, Pay Later: Advertising, Credit, and Consumer Durables in the 1920s (1991).
[75] Robert Mandelbaum, The Credit Card Industry: A History (1990).
[76] Eric Berg, Sears Earnings Drop 58.5% As Stores Lose $37.4 Million, N.Y. Times (Apr. 25, 1990).
[77] U.S. Gen. Accounting Off., GAO/GGD-88-37, Bank Powers: Issues Related to Reopening the Bank Holding Company Act (1988).
[78] Starbucks Corp., Annual Report (Form 10-K) 61 (Nov. 14, 2025), https://www.sec.gov/Archives/edgar/data/829224/000082922425000114/sbux-20250928.htm.
[79] Paul Calem, Tangled Up in Technicalities—An Historical Perspective on the Current ILC Debate, Bank Pol’y Inst. (Mar. 11, 2021), https://bpi.com/tangled-up-in-technicalities-an-historical-perspective-on-the-current-ilc-debate.
[80] Fed. Deposit Ins. Corp., Financial Institution Employee’s Guide to Deposit Insurance 77 (Apr. 1, 2024), https://www.fdic.gov/financial-institution-employees-guide-deposit-insurance/view-full-employees-guide-pdf.pdf.
[81] Peter J. Wallison, Why Are We Still Separating Banking and Commerce?, Am. Banker (July 27, 2017); Baradaran, supra note 58 (“The fears that the BHCA addressed could have been alleviated by adequate supervision instead of a complete ban on commercial ownership of banks.”); see also Arthur E. Wilmarth Jr., Wal-Mart and the Separation of Banking and Commerce, 39 Conn. L. Rev. 1539 (2007).
[82] Orla McCaffrey, The 15 Biggest Sponsorship Deals Between Banks and U.S. Sports Venues, Am. Banker (Aug. 21, 2023).
[83] Consumer Fin. Prot. Bureau, Taskforce on Consumer Financial Law Report 365–67 (Vol. 1, 2021).
[84] Kenneth Spong & Eric Robbins, Industrial Loan Companies: A Growing Industry Sparks Debate, Fed. Reserve Bank of Kan. City Econ. Rev. 43 (4th Q. 2007).
[85] Todd Zywicki, BankThink: Postal Banking Isn’t the Fix for Financial Inclusion, Am. Banker (June 13, 2019); see also Jean Ann Fox & Patrick Woodall, Cashed Out: Consumers Pay Steep Premium to ‘Bank’ at Check Cashing Outlets (Consumer Fed’n of Am., Nov. 2006).
[86] Paul Tierno, Cong. Rsch. Serv., R47104, Big Tech in Financial Services (July 29, 2022), https://www.congress.gov/crs-product/R47104.
[87] The Evolution of Banks and Financial Intermediation, 18 Fed. Rsrv. Bank N.Y. Econ. Pol’y Rev. no. 2 (July 2012), https://www.newyorkfed.org/medialibrary/media/research/epr/2012/eprvol18n2.pdf [hereinafter New York Fed Intermediation Paper].
[88] See Wallison, supra note 81.
[89] Sebastian Doerr, Jon Frost, Leonardo Gambacorta & Vatsala Shreeti, Big Techs in Finance, BIS Working Paper No. 1129 (Oct. 2023), https://www.bis.org/publ/work1129.pdf.
[90] See Bork, supra note 68.
[91] Zywicki, The Law and Political Economy Project: A Critical Analysis, supra note 63.
[92] Sandra E. Black & Philip E. Strahan, The Division of Spoils: Rent-Sharing and Discrimination in a Regulated Industry, 91 Am. Econ. Rev. 814 (2001).
[93] Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Pub. L. No. 103-328, 108 Stat. 2338 (codified as amended in scattered sections of 12 U.S.C.).
[94] Bill Medley, Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Fed. Rsrv. Hist. (Nov. 22, 2013), https://www.federalreservehistory.org/essays/riegle-neal-act-of-1994.
[95] Randall S. Kroszner & Philip E. Strahan, What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions, 114 Q.J. Econ. 1437 (1999).
[96] Bd. of Governors of the Fed. Reserve Sys., Perspectives from Main Street: Bank Branch Access in Rural Communities (2017); Consumer Fin. Prot. Bureau, Small-Dollar Lending and Financial Inclusion (2021); Fed. Deposit Ins. Corp., 2023 FDIC National Survey of Unbanked and Underbanked Households (2023).
[97] Julia Maues, Banking Act of 1933 (Glass-Steagall), Fed. Rsrv. Hist. (Nov. 22, 2013), https://www.federalreservehistory.org/essays/glass-steagall-act.
[98] See New York Fed Intermediation Paper, supra note 87.
[99] Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999) (codified as amended in scattered sections of 12 and 15 U.S.C.).
[100] Guiding and Establishing National Innovation for U.S. Stablecoins Act, Pub. L. No. 119-27 (2025).
[101] Richard M. Alexander et al., What You Need to Know About the New Stablecoin Legislation: Analyzing the GENIUS Act, Arnold & Porter (July 21, 2025), https://www.arnoldporter.com/en/perspectives/advisories/2025/07/new-stablecoin-legislation-analyzing-the-genius-act.
[102] Calem, supra note 79.
[103] Michelle Clark Neely, Industrial Loan Companies Come Out of the Shadows, Reg’l Economist (July 1, 2007), https://www.stlouisfed.org/publications/regional-economist/july-2007/industrial-loan-companies-come-out-of-the-shadows.
[104] Industrial Loan Charters Take Center Stage as De Novo Banking Makes a Comeback, PYMNTS (Feb. 5, 2026), https://www.pymnts.com/news/banking/2026/industrial-loan-charters-take-center-stage-as-de-novo-banking-makes-a-comeback.
[105] See Wilmarth, supra note 81.
[106] James R. Barth & Yanfei Sun, Industrial Banks: Challenging the Traditional Separation of Commerce and Banking, 77 Q. Rev. Econ. & Fin. 220 (2018).
[107] Some purely financial institutions chartered as industrial loan companies have failed, but none that were commercially owned.
[108] Barth & Sun, supra note 106.
[109] Baradaran, supra note 58, at 387.
[110] Fed. Trade Comm’n, A Look Behind the Screens: Examining the Data Practices of Social Media and Video Streaming Services (2024).
[111] In traditional regulatory terms, the tradeoff between a categorical rule and a more flexible standard requires weighing the risks of Type I and Type II errors.
[112] Benston, The Separation of Commercial and Investment Banking, supra note 43, at 137.
[113] Tech Translated: Banking as a Service (BaaS), PwC (July 11, 2024), https://www.pwc.com/gx/en/issues/technology/baas-banking-as-a-service.html.
[114] See Todd Zywicki, Regulatory Tripwires: How Arbitrary Thresholds Distort Financial Markets, Int’l Ctr. for L. & Econ., White Paper 2026-05-14 (June 2026).
[115] See, e.g., Krishnamurthy, supra note 49; see also Nicholas Taleb, Antifragile: Things That Gain from Disorder (2012) (arguing that efforts to suppress volatility and competition can promote stability while also fostering mediocrity and complacency); Todd Zywicki, Making Financial Regulation Antifragile, Law & Liberty (Dec. 15, 2013), https://lawliberty.org/book-review/making-financial-regulation-antifragile.
[116] John Krainer, The Separation of Banking and Commerce, Fed. Reserve Bank S.F. Econ. Rev. 15 (2000).
[117] Benston, The Separation of Commercial and Investment Banking, supra note 43.
[118] See Stephen K. Halpert, The Separation of Banking and Commerce Reconsidered, 13 J. Corp. L. 481 (1988).
[119] Taskforce on Fed. Consumer Fin. L., Consumer Finance and Technology, in Consumer Fin. Prot. Bureau, Taskforce on Consumer Financial Law Report, supra note 83, ch. 8.
[120] Section 4(k) of the Bank Holding Company Act permits financial holding companies to engage in activities that are “financial in nature,” incidental to financial activities, or complementary to financial activities. 12 U.S.C. § 1843(k).
[121] Federal Reserve Act §§ 23A–23B, 12 U.S.C. §§ 371c, 371c-1; Transactions Between Member Banks and Their Affiliates (Regulation W), 12 C.F.R. pt. 223.
[122] See Todd Zywicki, Comment to Consumer Financial Protection Bureau on Advance Notice of Proposed Rulemaking on Personal Financial Data Rights Reconsideration (Mar. 4, 2026), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6343318.
[123] See Zywicki, BankThink: Postal Banking Isn’t the Fix for Financial Inclusion, supra note 85; see also Consumer Fin. Prot. Bureau, Taskforce on Consumer Financial Law Report, supra note 83, ch. 11.
[124] World Bank Grp., Digital Public Infrastructure and Development: A World Bank Group Approach (2025); see also U.N. Dev. Programme, Digital Public Infrastructure (DPI), https://www.undp.org/digital/digital-public-infrastructure.
Popular Media (ICLE) According to the Silicon Valley creed, artificial intelligence will cause the near future to be weird. In what way? This is often left a bit vague. . . .
According to the Silicon Valley creed, artificial intelligence will cause the near future to be weird. In what way? This is often left a bit vague. Perhaps the cybersecurity capabilities of Anthropic’s Mythos model count as an early manifestation of the impending weirdness. Once models of this class proliferate, many of the computer systems that protect our data, our finances, or even our critical infrastructure may end up compromised on an unprecedented scale. True, the Mythos-wielding defenders (Project Glasswing) began shoring up defences, but this was quickly disrupted by the U.S.-ordered shutdown of the model.
Read the full piece here.
Regulatory Comments Introduction and Overview The International Center for Law & Economics (ICLE) is a nonprofit, nonpartisan research centre that promotes the use of law & economics . . .
The International Center for Law & Economics (ICLE) is a nonprofit, nonpartisan research centre that promotes the use of law & economics methodologies to inform public-policy debates. We welcome the opportunity to respond to the Commission’s consultation on its draft Guidelines on the assessment of mergers under the EU Merger Regulation (the ‘Draft Guidelines’), which are intended to supersede the 2004 Horizontal Merger Guidelines and the 2008 Non-Horizontal Merger Guidelines. We respond to the consultation part-by-part below.
We share several of the draft’s animating instincts. We welcome its recognition that mergers ‘may enhance competitiveness and growth’ (para. 2), that scale can be procompetitive (paras. 11–18), and that innovation, investment, and dynamic rivalry deserve a central place in merger analysis. The draft also usefully moves toward symmetry between harms and benefits—articulating a ‘theory of benefit’ alongside the theory of harm (para. 25) and insisting that efficiencies be assessed with ‘an equivalent degree of likelihood over time’ as the harms they offset (paras. 297, 341). These are meaningful improvements that respond to long-standing critiques of the EU’s asymmetric ‘double standard’ in the treatment of merger harms and efficiencies.
Our central concern is one of legal certainty. Guidelines exist to make outcomes predictable, and predictable, consistent merger review has long been one of Europe’s chief competitive advantages—a reason capital, talent, and firms choose to locate and scale here. The draft, by contrast, tries to do too much at once: police market power, accelerate innovation, secure supply chains, strengthen European competitiveness, advance sustainability, safeguard resilience and defence readiness, protect media plurality, and align merger control with industrial policy.
As the list of relevant factors grows, the set of transactions whose outcomes firms can predict with confidence shrinks. A framework that is broad in ambition but thin in operational guidance becomes, in practice, a standing invitation to litigate rather than a guide to compliance. If the Commission is serious about promoting procompetitive mergers and advancing the Draghi agenda on European competitiveness (Draghi 2024), the Guidelines need fewer ambitions and clearer rules.
This tension is sharpest in the draft’s expansion of forward-looking, qualitative theories of harm, including loss of innovation competition, loss of investment and expansion competition, entrenchment of dominance, dynamic foreclosure, and portfolio effects. Many of these theories turn on contestable predictions about distant and uncertain future market conditions. The economics is genuinely unsettled: the relationship between market structure and innovation is non-monotonic and context-dependent (Gilbert 2006; Cohen and Levin 1989); vertical and conglomerate integration is on average neutral-to-procompetitive (Lafontaine and Slade 2007; Cooper et al. 2005); and the empirical record on ‘killer acquisitions’ and ‘data moats’ is thin and industry-specific (Cunningham, Ederer, and Ma 2021; Gautier and Lamesch 2022; Manne and Auer 2024).
Where the evidence is uncertain, error-cost analysis counsels caution. Presumptions and burden shifts that are administratively convenient but economically noisy risk condemning efficient deals and chilling the very investment and innovation the draft seeks to promote (Manne 2020).
In the comments that follow, we press three recurring themes. First, structural indicators should remain soft screens, not presumptions or burden-shifting devices. Second, the draft’s welcome commitment to symmetry must be carried through in practice: the evidentiary bar for speculative long-term harms should be no lower than the bar the parties must clear for the efficiencies that offset them. Third, the proliferation of non-competition objectives—resilience, sustainability, media plurality, democracy, and security—should be handled with restraint and, where they fall outside the European Union Merger Regulation’s (EUMR) legal mandate, kept out of the substantive assessment altogether. With those caveats, the draft can be sharpened into a document that delivers the certainty its own paragraph 5 promises.
The introductory paragraphs of the Draft Guidelines set the tone for the document and, in important respects, improve on their predecessors. Paragraph 2’s acknowledgment that mergers ‘may enhance competitiveness and growth’ by contributing to innovation, enabling entry, generating scale and scope economies, combining complementary capabilities, and improving allocative efficiency rightly recognises that the great majority of mergers are benign or procompetitive. That recognition is welcome in today’s competition-policy environment, where calls for more aggressive enforcement are common.
The Guidelines would be stronger still if they stated that most mergers do enhance competitiveness and growth. That would align with the Commission’s own practice of clearing most transactions unconditionally and swiftly, often under the simplified procedure. In any event, we welcome the recognition that consolidation is not presumptively suspect.
We caution, however, against the more programmatic language elsewhere in the introduction. Paragraph 5 states that the Guidelines ‘aim to increase legal certainty and predictability…thereby facilitating business and investment decisions within the internal market’. That is the right objective. But the draft’s expanded analytical canvas—discussed throughout these comments—works against that objective unless each new concept is accompanied by clear, administrable limits. The Commission should treat paragraph 5 as a binding design constraint: where a proposed concept cannot be operationalised in a way firms can predict, it should be narrowed or omitted.
Paragraph 6’s statement that the Guidelines bind the Commission, but that it ‘may depart from these Guidelines if necessary’, faithfully reflects the case law (e.g., CK Telecoms). But self-binding guidance has value only insofar as it promotes consistency. The more the text invites case-by-case, discretion-laden judgments—particularly through the ‘margin of discretion’ the draft repeatedly reserves to itself (e.g., paras. 20, 27, 300, 342)—the less paragraph 6 will constrain outcomes in practice. The Commission should be candid that discretion and predictability are in tension and should resolve that tension, wherever possible, in favour of greater clarity for parties.
Paragraph 3’s decision to consolidate horizontal and non-horizontal guidance into a single instrument is defensible. Modern markets, especially digital and innovation-driven markets, are increasingly hard to pigeonhole as purely vertical or horizontal. But consolidation should not blur the analytically important distinction between the two.
Horizontal mergers automatically eliminate a competitor. Harm from a non-horizontal merger, by contrast, depends on a subsequent, non-automatic, and often unprofitable strategic choice to foreclose, while the efficiencies of vertical integration—notably the elimination of double marginalisation—are frequently automatic (Cooper et al. 2005; Lafontaine and Slade 2007). A single document should preserve, not collapse, the distinction between these merger types in light of their different probabilities and mechanisms of harm.
The Commission should also keep the consumer-welfare standard, expressed through the ‘significant impediment to effective competition’ test (SIEC test), as the lodestar of the entire instrument. The introduction gestures toward a wider set of goals, but the legal question the Guidelines exist to operationalise is singular: whether a merger would significantly impede effective competition to the ultimate detriment of consumers. Anchoring every subsequent concept to that question gives the Guidelines their disciplining force.
An error-cost perspective reinforces the point. Merger review is a screening exercise conducted under uncertainty. Both false positives—deterring or blocking procompetitive deals—and false negatives—clearing harmful ones—are costly. But because the overwhelming majority of mergers are benign or procompetitive (para. 2), and because an unpredictable regime chills benign and harmful transactions alike, a framework that multiplies speculative theories of harm without commensurate limiting principles will, in expectation, destroy more value than it preserves (Manne 2020). The introduction should acknowledge this asymmetry and resolve doubt in favour of clear, administrable rules.
Relatedly, the Guidelines should recognise that acquisitions are a normal and largely healthy feature of a well-functioning market for corporate control. The ability to sell a firm—including to a larger incumbent—disciplines management, rewards founders and early investors who finance risky ventures, and reallocates assets to those who can deploy them most productively (Manne, Bowman, and Auer 2022). For start-ups in particular, acquisition is a primary route to exit and a central incentive to innovate and attract venture finance.
Paragraphs 7–10 reframe merger control as contributing to growth, investment, innovation, competitiveness, and resilience. We agree these are products of well-functioning markets, and consistent with the purpose of the EU Merger Regulation (EUMR). Productivity and competitiveness are mutually reinforcing (Syverson 2011).
Unlike productivity, competitiveness is not embedded in the EUMR and can easily be misread as protecting European-owned firms from foreign rivals, including by impeding their acquisition by, or partnership with, foreign undertakings. Yet foreign capital and know-how can drive growth.
Paragraph 8 rightly treats competitiveness and resilience as consequences of enforcement grounded in the significant impediment to effective competition (SIEC) test. But the Guidelines should describe them as byproducts of the EUMR’s single mandate, not as objectives to maximise. This is not merely semantic. Agencies charged with multiple, fuzzy, unranked missions face weaker incentives and weaker accountability. By contrast, a single welfare lodestar gives competition law coherence and predictability (Dewatripont et al. 1999; Wright and Ginsburg 2013).
We recommend that the Commission state clearly that its mandate is singular: to prevent a SIEC. Competitiveness and resilience are welcome consequences of discharging that mandate well. They are not a licence for protectionism or independent grounds to clear or block a merger.
Paragraph 9 frames resilience— including supply-chain security, critical infrastructure, defence readiness—as something merger control ‘strengthens’. Paragraph 10 likewise calls for ‘adequate weight’ to be given to scale, innovation, investment, and resilience as procompetitive factors. We support the impulse, but resilience is novel and underdefined.
Two problems arise. First, resilience cuts both ways. It may justify clearing a consolidating merger that builds redundant capacity. But the draft also treats increased import reliance as a resilience harm (para. 92), risking protectionism through the back door. Second, resilience often requires excess capacity, which sits in tension with static efficiency. The Guidelines offer no method to weigh the two.
The distinction between procompetitive scale and harmful market power (paras. 11, 18) is the correct organising principle. Paragraph 15’s catalogue of scale benefits also maps onto our consultation response. Scale is decisive where fixed costs are high, marginal costs are low, and network effects are strong. In those settings, complementary combinations can expand networks, intangibles, and access to finance without creating market power (Teece et al. 1997).
One phrase should be operationalised or removed. Paragraphs 11–12 and 15(b) commend mergers that reach ‘the necessary size to compete in global markets’. Scale is frequently procompetitive, but ‘necessary size’ is not a workable merger-control concept. The Commission should not define the scale a firm ‘needs’.
The phrase invites two opposite errors: licensing consolidation as a route to national champions, or implying the Commission can identify—and cap—the scale that is ‘enough’. Neither judgment is authorised by the EUMR. Scale is not a harm to be cured; the only basis to impede it is transaction-specific evidence of a SIEC. We recommend the Commission either operationalise ‘necessary size’ with criteria tied to the SIEC assessment or delete the phrase, leaving scale presumptively procompetitive and subject to challenge only where the evidence shows a SIEC.
We welcome paragraphs 16’s recognition that start-up acquisitions are ‘unlikely to give rise to competition concerns’ and paragraph 17 recognition of non-horizontal mergers’ stronger potential for integration. For paragraph 15 to have practical effect, the Commission should clarify how its listed benefits are evidenced and weighed.
Two further clarifications are needed. First, the Commission should keep the SIEC assessment separate from the investment-screening and foreign-subsidies regimes. Concerns about who owns a European firm, or about distortive foreign subsidies, fall under the Foreign Direct Investment Screening Regulation and the Foreign Subsidies Regulation. Importing those concerns into merger control would conflate distinct legal tests and erode predictability. Genuine resilience and security concerns belong in the Article 21(4) legitimate-interests procedure, not in an expansive competitive assessment. We return to this issue in Part III.
Second, the scale benefits listed in paragraph 15 should be cognisable like other efficiencies under the Part II theory-of-benefit framework. The relevant question is often not whether a standalone firm could replicate a capability, but whether it could do so at efficient scale, in time, and with the finance that EU firms often lack (Draghi 2024).
Paragraph 20 rightly recognises that competition is multidimensional and extends beyond price. But the Draft Guidelines’ open-ended list—especially references to ‘media and cultural diversity’, sustainability, and resilience—risks absorbing objectives outside the EU Merger Regulation’s (EUMR) mandate.
The draft’s reserved ‘margin of discretion’ to weigh incommensurable parameters also risks leaving outcomes to unstructured judgment. We recommend that the Commission confirm that non-price parameters matter only insofar as they are genuine parameters of competition in the relevant market. The Commission should also supply a structured framework—likelihood, magnitude, and timing—for weighing those parameters. We return to that issue in our comments on paragraphs 341-347.
We strongly welcome the symmetrical burdens in paragraphs 21-25. The Commission must ‘articulate and substantiate’ a theory of harm and bears the ultimate burden to show a significant impediment to effective competition (SIEC) (paras. 21, 23). Paragraph 25, in turn, adds a ‘theory of benefit’ that the parties must substantiate.
That symmetry will have integrity only if applied even-handedly. Efficiencies must be shown with a likelihood and timeframe ‘equivalent’ to the harm (paras. 27, 297, 341). That principle must run both ways. If the Commission builds a speculative innovation or entrenchment theory on developments years in the future, parties’ efficiency claims over a comparable horizon must be equally admissible. Otherwise, the ‘innovation paradox’ defeats the draft’s promised symmetry (Gurkaynak 2023).
We urge the Commission to state expressly that the evidentiary and temporal standards for theories of harm and theories of benefit are identical.
The evidence section faithfully restates the case law. We support footnote 61’s recognition that the absence of internal documents concerning a theory of harm does not prove that the theory is absent, and that post-announcement documents have limited exculpatory value. But the same scrutiny should apply to documents the Commission uses to build a theory of harm.
Two cautions are warranted. First, paragraph 29’s allowance for the Commission to rely on information ‘without having to verify in detail the credibility and reliability’ of all of it should be tempered by the ‘more likely than not’ standard. Probative value, not volume, must govern.
Second, paragraph 30’s treatment of third-party views should retain the caveat about commercial incentives. Competitors’ objections are not evidence of consumer harm (para. 21).
We welcome paragraph 32’s single ‘more likely than not’ standard for all mergers, regardless of the theory’s complexity (CK Telecoms). We also welcome the confirmation that a preliminary finding of harm is not a precondition for efficiency claims, and that early engagement—including during prenotification—is encouraged.
The Commission could usefully publish a short best-practices note on the evidence and methodologies it finds persuasive for a theory of benefit.
We broadly endorse the counterfactual section: premerger conditions should remain the usual benchmark (para. 38), with adjustments for sufficiently certain future changes, crises, and alternative mergers (paras. 39-42).
This matters especially for innovation. Where innovation is the primary parameter of competition, a dynamic counterfactual should be the rule. Research-and-development pipelines and technological trajectories cannot be captured by static price models.
Our principal caution is symmetry of certainty. The ‘sufficient degree of certainty’ required for counterfactual adjustments must apply equally when the Commission uses a dynamic counterfactual to build a theory of harm and when parties invoke it defensively. Under Tetra Laval, the more contingent and forward-looking the causal chain, the more cogent the evidence required—in both directions.
The failing-firm and failing-division criteria (paras. 45-51) restate the established three cumulative conditions and are unobjectionable. One refinement is warranted for innovation-intensive sectors: financial distress does not imply competitive irrelevance.
The Commission should assess whether a distressed firm retains the capabilities needed to develop and commercialise its innovation projects. It should also assess whether, absent the merger, those capabilities would be preserved or dissipated through exit or insolvency. This is especially salient in the European Union, where unharmonised insolvency regimes risk causing assets and know-how to be lost rather than reallocated.
The counterfactual should weigh the merger’s effects on market power against the consequences of losing the firm’s assets and innovation potential. That inquiry should not be confined to cases that meet the strict failing-firm criteria. Capability dissipation bears on the counterfactual even where the formal defence is unavailable.
Paragraphs 52–54 establish the overall posture of the competitive assessment: a forward-looking, dynamic view of competition that considers not only short-term constraints, but also firms’ ‘capabilities and incentives to compete for future business’. That assessment is conducted, in principle, market by market, while remaining attentive to cross-market links, including complements, networks, shared technologies, bundling, multisided platforms, and ‘ecosystems’. We support the forward-looking orientation and the recognition that some industries are closely linked across markets. Two structural observations follow.
First, paragraph 54’s recognition that links across markets—including non-structural links such as distribution agreements, licensing, alliances, or asset sharing—may be relevant is analytically defensible. But it must be cabined. Taken too far, it would allow the Commission to aggregate the market shares of firms that are connected by contract but remain independent competitors, or to deny that a connected firm is a genuine competitive constraint.
This concern is more than hypothetical. The recent wave of AI partnerships—Microsoft/OpenAI, Amazon/Anthropic, and others—involves precisely such non-structural links. Yet the available regulatory record—including the Federal Trade Commission’s Section 6(b) staff report, the Competition and Markets Authority’s decisions on Microsoft/OpenAI, Microsoft/Mistral, Microsoft/Inflection, and Amazon/Anthropic, and the Commission’s own Competition Policy Brief—has identified only theoretical concerns and no concrete evidence of harm. Several authorities have also expressly declined to find a relevant merger situation (Auer and Zúñiga 2026).
These partnerships frequently enhance competition by supplying start-ups with capital, compute, and distribution while preserving their autonomy. We urge the Commission to make clear that the existence of a non-structural link does not justify share aggregation, or the dismissal of a firm as a competitor, absent concrete evidence that the link removes most of the competitive constraint the firms impose on each other.
Second, the draft’s general approach to market power in paragraphs 55–59 is sound in its core architecture and consistent with both the case law and modern industrial-organisation economics. Paragraph 55 correctly defines market power as the ability to maintain prices above—or quality, choice, capacity, output, investment, innovation, privacy, sustainability, or resilience below—competitive levels for a period of time.
Crucially, paragraph 57 states that market power ‘is assessed using a combination of factors, none of which is individually decisive’, and that structural indicators provide only ‘useful first indicators’. That is exactly right and should be preserved. It reflects decades of evidence that concentration is, at best, diagnostic and, at worst, a misleading predictor of competitive harm (Demsetz 1973; Berry, Gaynor, and Scott Morton 2019; Syverson 2019).
We also welcome paragraph 58’s recognition that, in ‘specific dynamic settings, a static assessment of market power may be less appropriate’, as well as the related willingness to adjust market-share and margin indicators for reasonably certain changes in the competitive environment. This is the correct instinct for fast-moving markets, where apparent dominance can erode quickly.
The key, again, is symmetry and discipline. Dynamic adjustments that may reveal hidden market power (para. 64(b)) must be applied with the same evidentiary rigour as dynamic adjustments that reveal hidden competitive constraints (paras. 86–100 on entry and expansion). The Commission should not adopt a posture in which dynamism is invoked to find power but discounted when it would constrain power.
A final word on the recurring reference to ‘ecosystems’ (paras. 54, 252–259). The term has intuitive appeal but no settled economic definition, and it risks becoming a label that licenses intervention without a concrete theory of harm (Colangelo 2026). Almost every successful firm sits within some web of complements, partners, and adjacent products. Describing that web as an ‘ecosystem’ does not, without more, establish either market power or a mechanism by which a merger would harm competition.
We therefore urge the Commission, wherever it invokes ecosystem or cross-market considerations, to identify the specific markets affected, the specific constraint allegedly removed, and the specific mechanism of harm. In other words, the same analytical discipline the draft rightly applies to single-market analysis should apply with at least equal force when a theory spans several markets. That analysis should also recognise that complex, multipronged theories of harm are, all else equal, less likely to occur.
We support the draft’s treatment of structural indicators as screens rather than presumptions, and we urge the Commission to hold that line. Paragraph 57 rightly frames market shares and the Herfindahl-Hirschman Index (HHI) thresholds in paragraph 65—below 1,000 as unconcentrated and above 2,000 as highly concentrated—as ‘useful first indicators’. Paragraph 64 likewise lists the many circumstances in which shares fail to capture market power. That framing should be retained without qualification.
EU merger control turns on a case-by-case significant impediment to effective competition (SIEC) assessment, in which shares and HHIs are first indications, not dispositive rules. The existing texts provide that thresholds ‘do not give rise to a legal presumption’. This architecture—soft screens, no burden shift, and proof of a SIEC remaining with the Commission on a more-likely-than-not standard, including below dominance—is a strength to preserve, not reverse.
The economic record does not support converting these screens into presumptions or making them stricter. Decades of industrial-organisation research find no stable, policy-reliable relationship between concentration and harm, and treat structural measures as poor standalone predictors of price effects (see, e.g., Demsetz 1973; Berry, Gaynor, and Scott Morton 2019; Syverson 2019). Concentration is frequently a product of efficiency rather than anticompetitive conduct. Effects are highly sensitive to market definition. And the ‘rising markups/growing concentration’ literature animating calls for stricter presumptions is itself contested.
Measured markups are sensitive to the accounting of intangibles and fixed costs. National concentration can rise even as local competition intensifies, making it a poor proxy for local conditions. The direction of causation also remains unresolved (Rinz 2022; Syverson 2019). Turning indicative screens into rebuttable presumptions would invert the EUMR’s architecture, increase Type I errors, and chill procompetitive deals—all to obtain an administrative convenience the economics do not justify.
We particularly welcome paragraph 64’s catalogue of the limits of share-based analysis. Shares may fail to capture the intensity of competition, as homogeneous products may compete vigorously even in concentrated markets. They may understate the constraint from an ‘important competitive force’ or a firm with ‘dynamic competitive potential’. Most importantly, ‘in nascent, fast-growing or short-innovation-cycle markets, market shares may provide a less reliable indicator’.
This last point is essential. Digital-market definitions often miss that users—and the advertisers seeking them—switch across a wide variety of services, not only functionally similar ones, often instantly and at no cost. The differentiation that forms the core of a challenger’s threat is too often treated as evidence that the firms do not compete. The January 2025 TikTok outage, after which usage migrated sharply to Instagram, YouTube, Facebook, and even Messenger, shows how broad and immediate cross-service substitution can be. In dynamic markets, share-based screens combined with narrow market definitions tend to overstate the market power of both merging parties and their rivals.
Two clarifications would improve predictability. First, the Commission should state expressly that shares and HHIs are screens, and that any SIEC theory—especially an ‘important competitive force’ theory or differentiated-products unilateral-effects theory—must rest on transaction-specific evidence of diversion, margins, and repositioning, not structural thresholds alone.
Second, the Commission should reaffirm or relax, not tighten, the existing market-share and HHI safe harbours, and should explain how other evidence—diversion ratios, margin or upward-pricing-pressure-type tools, capacity, and pivotality—is weighed once a screen is crossed. Clear, generous safe harbours are among the most valuable certainty-enhancing features a merger-control regime can offer. Because most transactions fall well below any plausible threshold of concern, bright-line screens spare benign deals the cost and delay of in-depth review.
The Commission should confirm that falling within a safe harbour creates a strong practical expectation of clearance, even though the ultimate test remains the SIEC standard. Narrowing the harbours, or qualifying them with open-ended exceptions, would transfer a large volume of benign transactions into uncertainty for no demonstrated benefit. The Commission should also guard against the descriptive bands in paragraph 62—‘low’, ‘moderate’, ‘material’, ‘high’, and ‘very high’—hardening into de facto thresholds.
Paragraphs 68–79 bring economically grounded indicators of market power—price sensitivity, margins, and barriers—to the foreground. The draft’s useful contribution is to make these indicators explicit, central, and assessed at the firm level, rather than scattered across market definition, effects, entry, and buyer power. We welcome that reorientation and comment on each indicator below.
Examining customers’ past propensity to switch and rivals’ propensity to expand—through churn, switching, elasticities, and natural experiments—is a sound, effects-based method. But low observed switching is ambiguous. It can reflect genuine lock-in and market power, or simply that customers have found a product that suits them better.
In digital markets, ‘inertia’ is not itself an indicator of harm. Lock-in can also intensify upfront ‘competition for the market’ (Klemperer 1987; Farrell and Klemperer 2007). The net effect of switching costs is therefore ambiguous and should be assessed on the evidence, not presumed.
The Commission should also distinguish switching from multihoming. When customers use several providers in parallel, ‘stickiness’ on one service overstates the constraint the customer faces. The relevant question is whether a customer can place incremental demand elsewhere in response to worse terms, not whether the customer terminates the service altogether. Cheap multihoming can discipline a high-share firm as effectively as switching.
We strongly welcome paragraph 70’s recognition that ‘high margins may be less likely to indicate market power if they are temporary… in markets characterized by a fast pace of innovation’. Schumpeterian rents reward risky investment. They are not necessarily symptoms of harm. Penalising them would blunt the very incentive the draft seeks to protect.
The Commission should apply that insight consistently to the industry-wide margins discussed in paragraph 73, which may reflect rewarded innovation as readily as barriers. Increases in markups do not systematically track the declines in business dynamism that entrenchment would predict (Albrecht and Decker 2026). A high margin is a residual whose source should be identified with evidence, not inferred from its level.
Paragraph 74’s recognition that firms may hold power despite low margins—through penetration pricing or multisided monetisation—is also welcome. In those cases, the relevant question is the net price across all sides, not the headline consumer price (Rochet and Tirole 2006). A low or zero price on one side is therefore not evidence of harm where another side cross-subsidises it. Likewise, a merger that internalises cross-side externalities may lower aggregate prices even while raising one fee.
The draft’s focus on demand-side switching and supply-side entry and expansion is the right one. Our principal caution concerns digital-specific barriers, especially data and network effects, which are too often treated as presumptive.
Data are largely non-rival, frequently replicable, and often obtainable through public sources, licensing, partnerships, or synthetic generation. Their value shows sharply diminishing returns, and freshness often matters more than depth (Manne and Auer 2024). The growth of generative-AI entrants despite incumbents’ vast data troves is hard to reconcile with strong data-entrenchment claims.
Network effects are likewise double-edged. They intensify ‘competition for the market’, can operate in reverse—as with MySpace—and rarely confer perpetual dominance absent exclusionary conduct (Evans and Schmalensee 2016).
Paragraph 79’s strategic-conduct barriers—limit pricing, excess capacity, intellectual-property enforcement, and loyalty rebates—should be applied cautiously. Competition on the merits is not a barrier. The Commission should require evidence that the conduct deters entry.
More broadly, the Commission should distinguish genuine impediments from features that are rewards or byproducts of competition on the merits. Intellectual property, economies of scale, and a strong brand can look like barriers, yet each is often a mechanism by which competition delivers benefits: patents reward innovation, scale lowers costs, and brands economise on search. Before treating a feature as a barrier, the Commission should require concrete evidence that it actually impedes timely and sufficient entry, not infer a barrier from an incumbent’s size or success.
The same caution applies to ‘tipping’ and ‘winner-take-most’ dynamics, which the draft treats as markers of entrenched power. Tipping often reflects the market rewarding a superior product. A tipped position is not durable where users multi-home, interoperability or data portability lowers switching costs, and adjacent innovation can redefine the product. The Commission should ask not whether a market has tipped, but whether the conditions to ‘untip’ it are present.
The introduction of ‘dynamic competitive potential’ (paras. 80–83) is one of the draft’s most significant analytical innovations, and we support its underlying premise. In industries where innovation is an important parameter of competition, a static snapshot of market shares and margins can badly mischaracterise a firm’s competitive strength or weakness. A firm with a thin current share but powerful innovation capabilities may exert far more competitive influence than its static position suggests. Conversely, a firm with high current shares may be competitively fragile if its dynamic potential is exhausted. Capturing this is consistent with the economics of dynamic competition.
The same feature that makes this concept valuable, however, makes it hazardous to legal certainty if left undisciplined. The indicators listed in paragraphs 81–82—numbers and time to market of pipeline products, track record, research-and-development spend and headcount, patent citations, internal innovation targets, access to data or user traffic, ‘dynamic capabilities arising from a given business model’, complementarities, synergies between intangible assets, the ability to exploit network effects across products, and the breadth of an ‘ecosystem’—are so numerous and qualitative that many firms could be characterised as possessing, or lacking, dynamic competitive potential depending on which indicators the Commission emphasises.
Paragraph 81’s suggestion that ‘the high valuation of a target by the purchaser, especially compared to its turnover, may…provide an indication’ of competitive significance is particularly concerning. Acquisition price reflects many things: complementarity, option value, talent, the acquirer’s superior ability to redeploy assets, and ordinary competition in the market for corporate control (Manne, Bowman, and Auer 2022). Treating a high multiple as a marker of competitive significance risks penalising exactly the value-creating combinations the draft elsewhere applauds.
We therefore recommend three disciplines. First, the assessment of dynamic competitive potential must be symmetric. The same factors the Commission uses to attribute hidden strength to a merging party must also be used to credit the dynamic competitive potential of remaining rivals and entrants as countervailing constraints. The draft gestures toward this in paragraph 85; it should make the point explicit and apply it consistently.
Second, dynamic competitive potential, like all forward-looking elements, must be ‘predicted with a sufficient degree of certainty’ and substantiated with concrete, contemporaneous evidence. It should not be inferred from structural proxies such as research-and-development shares, which economic theory shows are unreliable predictors of innovation behaviour (Cohen and Levin 1989; Gilbert 2006).
Third, the Commission should clarify that high acquisition value is, at most, a prompt for further inquiry and never, on its own, evidence of a significant impediment to effective competition (SIEC). With these limits, dynamic competitive potential can sharpen the analysis. Without them, it becomes a licence to find market power wherever static analysis fails to.
Finally, we encourage the Commission to integrate the innovation life cycle into this assessment. Industries pass through stages of technological opportunity, and a firm’s dynamic competitive potential—and the competitive consequences of combining capabilities—depends heavily on where the market sits along that curve (Utterback and Abernathy 1975; Cohen 2010). All else equal, a merger of strong innovators in a maturing market with dwindling opportunity is more likely to dampen rivalry than a merger in a nascent, turbulent space where contestability and entry remain high. Building life-cycle reasoning into the dynamic-competitive-potential analysis would make it both more accurate and more predictable.
We would flag one further risk specific to this concept: double counting across the analysis. The same forward-looking narrative—‘this nascent technology will become competitively pivotal’—can be used simultaneously to inflate the merging parties’ competitive significance, discount the constraint from rivals on the view that their efforts will fail, and construct an innovation- or entrenchment-based theory of harm. Each step compounds the uncertainty of the last.
Consistent with Tetra Laval, the evidentiary burden should rise with the length and predictive uncertainty of the chain of inferences. The Commission should be required to show that the same dynamic assumptions are applied even-handedly to the parties and to their competitors. Where the evidence does not permit a confident prediction about how the technology or market will evolve, dynamic competitive potential should counsel caution about intervention, not support it.
The countervailing-factors section—covering entry and expansion, out-of-market constraints, and buyer power—is well constructed. Paragraph 85’s instruction that countervailing factors be assessed ‘in line with…the criteria it applies to the assessment of harm’ reflects exactly the symmetry we have urged. We support the framework and offer refinements to preserve that symmetry in practice.
The three cumulative criteria—likelihood, timeliness, and magnitude (para. 93)—are the established and correct test. We welcome paragraph 86’s recognition that entry may come from global firms outside the internal market. We also welcome paragraph 96’s flexibility on timing: a two-year default, but openness to longer horizons where market dynamics, the theory of harm, or entrants’ capabilities warrant.
That flexibility is essential. If the Commission assesses a loss of future competition over a multiyear horizon, it must equally credit entry and expansion that could constrain the merged firm over a comparable horizon. Long horizons for harm, paired with short horizons for offsetting constraints, would be indefensible.
Our main concern is the evidentiary asymmetry latent in paragraph 94, which requires ‘concrete plans to enter or expand at the relevant scale’ for entry to countervail a loss of existing competition, while elsewhere treating a target’s own potential entry as a competitive force on thinner evidence. Countervailing entry should, of course, be evidenced. But the standard should match the standard for treating a firm as a potential competitor whose loss is harmful. We return to this point in Part II.B.5.
Paragraph 100 already acknowledges that the perceived threat of entry can more readily countervail a loss of potential competition than a loss of existing competition. That is a sensible calibration. The Commission should make the parallel explicit: the evidentiary bar for crediting a constraint should mirror the bar for asserting the corresponding harm.
On imports (paras. 91–92), we caution against treating increased import reliance as itself a resilience harm. Imports are first a competitive constraint. Treating them as harm risks smuggling in protectionism and contradicts the draft’s own recognition (paras. 7–10) that openness drives competitiveness. Resilience concerns about import dependence, if entertained, should be confined to genuinely critical inputs and supported by evidence. They should not be used to discount foreign competition generally.
We welcome paragraph 101’s recognition that the Commission considers all competitive constraints ‘irrespective of whether they arise from inside or outside the relevant market’. That is especially important given the Commission’s historically narrow market definition in digital markets, which tends to exclude differentiated and adjacent services that in fact constrain the parties.
Paragraph 102’s caveat—that such constraints are often limited because they are not immediate and effective—is an acceptable first approximation. But it should not justify disregarding real cross-market and cross-platform rivalry, especially in multisided settings where platforms that look like imperfect substitutes on the consumer side compete intensely for the same advertisers. The Commission should weigh out-of-market constraints on the evidence, not discount them categorically.
The treatment of buyer power is orthodox and sound. Buyer power must exist and remain effective after the merger, since a merger of suppliers may itself reduce buyer power by removing a credible alternative (para. 105). We add only that buyer power and the corresponding monopsony analysis in Part II.B.2.4 should be applied with the same effects-based discipline as supplier-side power. Large, sophisticated customers able to sponsor entry or switch suppliers are a genuine and often underweighted constraint in industrial markets.
One structural point cuts across all three categories. In dynamic and digital markets, the entry, expansion, and repositioning that discipline incumbents are often financed by the very prospect of acquisition that the draft’s dynamic theories of harm would discourage. Venture capital flows to start-ups largely because acquisition offers a credible, lucrative exit. Chilling that exit reduces the financing available for the next generation of entrants and weakens the countervailing constraint of future entry (Manne, Bowman, and Auer 2022).
The Commission should therefore weigh, in assessing entry and expansion, the systemic effect of its own enforcement posture on the incentive to enter. Crediting entry as a countervailing factor while discouraging the acquisitions that finance entry would be internally inconsistent.
The draft correctly treats dominance as a specific, higher degree of market power along a continuum (paras. 56, 111). It also states that a significant impediment to effective competition (SIEC) may arise below dominance (para. 113). This framing reflects the current SIEC standard as developed in the case law. The draft also rightly acknowledges that firms may legitimately acquire market power ‘through internal growth and competition on the merits’ (para. 56)—that is, through natural and efficient conduct. ICLE offers two observations to preserve certainty.
First, because several theories of harm are tethered to dominance—most notably entrenchment (paras. 252–259)—the Guidelines must define ‘dominance’ precisely and explain how it is established. Since United Brands and Hoffmann-La Roche, rigorous market definition and proof of market power within the defined market have been the foundations of dominance analysis.
Yet paragraph 54 invites assessment ‘across markets’ where they are linked as an ‘ecosystem’, and paragraphs 252–253 allow dominance—and, in particular, entrenchment—to be appraised ‘in the context of an ecosystem’. The risk is that dominance is established through narrative aggregation of positions across distinct markets, without defining a relevant market or demonstrating power within it. That would make dominance a conclusion derived from description rather than analysis.
Booking/eTraveli illustrates the danger. The ecosystem characterisation appeared only in a footnote, as Booking’s ‘wide range of services that cover multiple facets of the travel experience’, with no market-defined anchor (Colangelo 2026). The dominance threshold already embeds durability through very high shares sustained over time (para. 112). In the entrenchment scenario, which we address in Part II.B.7, the Commission should not be permitted to bypass that discipline through a loosely bounded ecosystem.
Second, the Commission should not treat below-dominance market power as a lower evidentiary hurdle. The SIEC standard—more likely than not, on a cogent and consistent body of evidence—applies whether or not the merged firm is dominant. The risk of dilution is most acute in the ‘important competitive force’ concept (paras. 138–141): a firm with a ‘relatively small—or even zero—market share’ may be labelled an important competitive force (para. 141).
That inquiry must rest on transaction-specific evidence of diversion, closeness, and margins—the tools the draft itself invokes (para. 138)—not on structural inference. The draft’s own limiter should also be applied strictly: no firm should be treated as an important competitive force where a sufficient number of comparable rivals remain (para. 141). Otherwise, the label can be turned against the very disruptive entrants whose competitive threat it is meant to capture.
Finally, ICLE welcomes the draft’s recognition that market power is a matter of degree and that the operative question is always whether the merger significantly impedes effective competition—not whether a label such as ‘market power’, ‘substantial market power’, or ‘dominance’ can be affixed. Some degree of market power is ubiquitous; only its amount matters (Landes and Posner 1980).
Identifying some degree of market power is therefore the beginning of the analysis, not its conclusion. The Commission must still show that the increment attributable to the merger significantly impedes effective competition. A finding of market power, without more, neither establishes a SIEC nor relieves the Commission of its burden of proof (Manne et al. 2024). Keeping that distinction sharp guards against the gradated framework sliding into a presumption that mergers involving large or successful firms are inherently problematic.
Paragraph 114 introduces a new organising distinction between ‘direct’ effects—concerned chiefly with competition within current product markets—and ‘dynamic’ effects, which concern the merger’s impact on the merging firms’ and rivals’ ability and incentives to invest and innovate, as well as on future product-market competition. We support recognising that mergers can affect competition through more than near-term price effects. The draft is also right that the difference between direct and dynamic effects is ‘less a matter of kind and more a matter of degree’, since a single merger may exhibit both.
The introduction of a dynamic-effects category is, however, the hinge on which much of our concern about legal certainty turns. The dynamic theories of harm that follow—loss of investment and expansion competition, loss of innovation competition, loss of potential competition, dynamic foreclosure, and entrenchment—are inherently forward-looking, often qualitative, and frequently contingent on multiple uncertain future events. Three cross-cutting principles should govern this entire subsection and should be stated up front.
First, evidentiary rigour must be commensurate with uncertainty. The Court has held that the burden of proof rises with the uncertainty of the theory of harm (Tetra Laval). The more contingent or distant the alleged effect, the more demanding the evidence must be. Dynamic harms should therefore be substantiated with multi-sourced, triangulated, contemporaneous evidence—including internal documents, market studies, independent expert assessments, and, where available, ex post evidence from comparable cases—not with structural conjecture.
Second, harms and benefits must receive equal treatment. Dynamic effects cut both ways. The very features that can give rise to dynamic harm—the combination of capabilities, redeployment of research and development, and internalisation of complementarities—are also the principal sources of dynamic efficiency. The draft acknowledges this symmetry (paras. 297, 345). A merger should therefore not be charged with a speculative dynamic harm while its symmetric dynamic benefit is discounted for the same speculativeness.
Third, competition and innovation are non-monotonic. The economics literature is clear that the relationship between rivalry and innovation is non-monotonic and context-dependent: eliminating a rival does not always reduce innovation incentives and may, under some conditions, increase them (Aghion et al. 2005; Gilbert 2006; Denicolò and Franzoni 2010). The Guidelines should not embed an implicit assumption that fewer competitors mean less innovation. We develop these points in the subsections that follow.
We would add a fourth, practical principle: candour about the maturity of each theory. Some dynamic theories, such as loss of potential competition, have a longer pedigree and a reasonably developed evidentiary template. Others, including entrenchment of an ‘ecosystem’ position or dynamic conglomerate foreclosure, are comparatively novel and rest on contested economics. The Guidelines would improve predictability by acknowledging this gradient and by signalling that the more novel and contested the theory, the more exacting the required evidence and the narrower the circumstances in which the Commission will rely on it.
An error-cost lens makes the stakes plain. Because dynamic theories operate over long horizons and uncertain predictions, the cost of false positives—deterring procompetitive investment, research and development, and capability combinations—is especially high and especially difficult to detect after the fact (Manne 2020). That asymmetry counsels particular restraint in the dynamic domain.
One cross-cutting point deserves emphasis before turning to the specific theories: the dynamic counterfactual does much of the work in this entire chapter, and it must be constructed symmetrically. A dynamic theory of harm typically depends on a prediction about what the target or acquirer would have done absent the merger—launched a pipeline product, entered an adjacent market, or intensified a research-and-development race. The draft rightly requires (paras. 37–44) that such predictions be made with a ‘sufficient degree of certainty’.
That same standard must constrain the harm side. The Commission cannot treat a speculative future competitive contribution as a near certainty when building a theory of harm while dismissing the parties’ symmetric claims about future efficiencies as too uncertain to credit. Where the evidence does not support a confident prediction about the counterfactual, the appropriate inference is uncertainty about harm, not a presumption of it.
The loss of head-to-head competition—unilateral effects from combining substitutes—is the draft’s most established theory of harm. The framework in paragraphs 119–168 is sound at its core. Our comments aim to keep the analysis anchored in transaction-specific evidence and to address the novel ‘specific market aspects’, especially labour monopsony.
We support the emphasis on closeness of competition—diversion ratios, margins, bidding, and switching evidence—as the analytical heart of this theory. This evidence, not structural presumptions, should govern. Consistent with Part II.A.1, high combined shares or Herfindahl-Hirschman Index increases may prompt closer inquiry, but they do not establish harm.
The question is whether the parties are close enough competitors that their combination would allow the merged firm profitably to worsen terms, accounting for repositioning and entry. Pricing-pressure tools—including upward-pricing pressure, gross upward-pricing pressure index, and merger simulation—are appropriate where the data support them. But they are models, not oracles, and their assumptions should be tested against the evidence.
A recurring problem is that closeness is assessed against an artificially narrow market, inflating diversion between the parties and understating diversion outside it. This is especially true where users multi-home and switch cheaply. Diversion ratios should therefore be estimated against the full set of realistic alternatives, including out-of-market and cross-platform options, not a narrow set that builds the conclusion into the premise.
Internal documents are probative, but they should be weighed against the quantitative record and scrutinised equally in both directions (paras. 26–31). Casual references to ‘competitors’ do not establish substitution.
The ‘important competitive force’ concept usefully captures firms whose influence exceeds their share, including mavericks and disruptive entrants. But its under-definition invites expansive and unpredictable application. The Guidelines should specify what the concept means and how it is evidenced. Relevant evidence may include a documented role in driving price or innovation responses, or a track record of disruption. The concept should not substitute for transaction-specific evidence of the constraint imposed. Otherwise, it risks manufacturing concern about firms with modest shares.
The treatment of specific market aspects is a welcome attempt to tailor the analysis. On multisided platforms, harm and efficiency must be measured at the platform level, accounting for cross-side externalities and net prices. Differentiation on one side does not preclude intense competition on another (Rochet and Tirole 2003).
On labour markets, we support confining the analysis, as the draft does, to ‘solely how the merger impacts market power on labor markets’, excluding effects ‘unrelated to the loss of competition resulting from the merger’. A labour-market theory should be entertained only where there is a clear, measurable loss of competition in a properly defined labour market, supported by evidence of employer concentration, limited mobility, and a plausible monopsony mechanism.
The Commission should separate genuine monopsony from restructuring, offshoring, or headcount reductions that flow from efficiency gains, which fall outside the EUMR. A labour effect is typically downstream of a product-market harm, since reduced output is what cuts derived labour demand. The Commission should require the same effects-based showing as for any unilateral-effects theory and should not treat job losses as such as a competition concern.
Paragraphs 167–168 would treat ‘non-structural links’ between a merging party and a competitor—including distribution, licensing, alliances, intellectual-property sharing, and network sharing—as reducing competition. Where those links ‘remove most of the competitive constraint’, the draft would aggregate the firms’ shares. This should be confined to genuinely exceptional cases tied to evidence approaching common control.
Such links are pervasive, ordinary, and usually procompetitive. Their mere existence does not make two undertakings a single competitive unit. Aggregating shares on that basis would penalise efficiency-enhancing cooperation and understate the constraint imposed by connected but independent rivals.
Consistent with error-cost logic (Manne 2020) and the Commission’s burden to substantiate harm on cogent, consistent evidence (paras. 23, 26), the Guidelines should state three principles. First, non-structural links should bear on the analysis only exceptionally. Second, share aggregation should require evidence of common control or its functional equivalent. Third, absent such evidence, a connected firm remains a full competitive constraint to count, not discount.
This new theory of harm posits that a merger may lessen competition by reducing the merging firms’ incentives or ability to invest in, or expand with, existing tangible assets. Paragraph 171 would assess that risk by reference to the parties’ market power over existing assets, their dynamic competitive potential, the degree of dynamic competitive interaction, closeness of competition, the number and capability of remaining competitors with investment capabilities, and entry or expansion by rivals.
We recognise the intuition. Capacity, investment, and expansion are genuine parameters of competition. But the theory requires careful limits to avoid condemning ordinary, efficiency-driven rationalisation of capacity and investment.
Two cautions are paramount. First, investment and expansion decisions are precisely where merger efficiencies are most likely to arise. A combined firm may invest in shared infrastructure, data centres, or capacity that neither party could justify alone, internalising returns across complementary assets and a larger addressable base. A reduction in duplicative investment is frequently an efficiency, not a harm.
The Guidelines must therefore distinguish genuine, merger-specific suppression of competitive investment from the elimination of wasteful duplication. They should require evidence that post-merger investment or capacity would fall below the competitive level, not merely that two independent investment programmes become one.
Second, because this theory rests heavily on ‘dynamic competitive potential’ and ‘dynamic competitive interaction’, it inherits all the certainty concerns raised in Part II.A.3. The factors in paragraph 171 are qualitative and elastic. Without discipline, almost any merger between two firms that invest could be framed as a loss of investment competition.
The Commission should require three showings: first, transaction-specific evidence that the parties’ investment programmes are genuine substitutes that discipline one another; second, credible evidence, predicted with sufficient certainty, that the merged firm would reduce investment or expansion below the counterfactual; and third, an honest accounting of offsetting investment efficiencies, assessed on the same evidentiary terms. Without those limits, the theory risks penalising the very scale-enabled investment the draft elsewhere encourages (paras. 11–15).
The risk of overapplication is especially acute because capacity, investment, and expansion decisions are continuous responses to demand, technology, and the cost of capital. Two independent firms will often make duplicative or partially overlapping investments. Combining them and rationalising those investments is, in the ordinary case, exactly the kind of efficiency that justifies a merger.
The theory of harm therefore asks the Commission to identify the rare case in which the merged firm would withhold investment or capacity the market would otherwise have received, and to do so through a prediction about counterfactual investment behaviour years into the future. That is a demanding evidentiary task, and the draft should say so plainly. In particular, the Commission should not treat a post-merger reduction in aggregate capital expenditure as evidence of harm. Reduced duplication and the reallocation of capital to higher-value uses are precisely how scale efficiencies manifest.
We also note that the boundary between this theory and the loss-of-innovation theory in Part II.B.4 is blurry, since investment in new capacity and investment in research and development can shade into one another. The Commission should avoid charging the same conduct twice under two labels. Whichever framework applies, offsetting efficiencies—including lower costs, the ability to fund investment that neither party could finance alone, and the elimination of double marginalisation in any vertical dimension—should be credited on the same evidentiary terms as the alleged harm (paras. 297, 341).
The dedicated treatment of innovation competition is among the draft’s most welcome features. Innovation and price operate through distinct mechanisms, and marginal-pricing logic is not designed to capture innovation effects. A separate, properly bounded framework for innovation harm is therefore the right step. The challenge is to capture genuine innovation harms without chilling the many mergers that combine capabilities and advance innovation.
Our central substantive point is that innovation analysis must move beyond structural proxies. Paragraphs 175–191 rest on the ‘innovation space’ construct, the ‘important innovative force’ label (paras. 189–191), and whether a ‘sufficient number’ of comparable innovators remain (para. 188). These are coarse proxies prone to overreach. Because the relationship between competition and innovation is non-monotonic (Aghion et al. 2005), with theory and evidence pointing in both directions (Cohen and Levin 1989; Gilbert 2006), sound innovation analysis must be fact intensive and case specific (Bourreau, Jullien, and Lefouili 2024).
More fundamentally, the draft conflates two concepts. The resource-based view treats firms as bundles of tangible and intangible resources (Barney 1991). Capabilities are different: they are the organisational ability to deploy those resources to a coordinated end (Helfat and Peteraf 2003). Footnote 265 collapses the distinction by defining ‘innovation capabilities’ to include ‘innovation resources’—describing what firms own, not what they can do (Ünekba? 2026).
The distinction matters. Resources can often be rebuilt or bought, so acquiring them need not durably harm competition. Capabilities, by contrast, are organisationally embedded, path dependent, and imperfectly imitable (Barney 1991; Teece, Pisano, and Shuen 1997).
Innovation harm also depends on contestability—whether the market remains open—not only on incentives. A merger that brings overlapping capabilities under unitary control, ‘thereby thwarting future variety in new product development’ (Sidak and Teece 2009), is more likely to harm innovation than one that combines complementary capabilities. Such complementary combinations often expand the frontier and may be a capital-starved project’s only route to market.
The Guidelines should therefore treat complementary-capability combinations as presumptively procompetitive and account for the innovation life cycle. Rivalry is more likely to be dampened in maturing markets than in nascent ones (Utterback and Abernathy 1975).
The ‘loss of general innovation competition’ theory, which assesses rivalry industrywide, risks stretching potential competition into speculative pathways that are easy to assert and hard to rebut. If retained, it should require cogent evidence that the parties are genuinely substitutable in innovation and that no comparable capability remains.
The ‘innovation shield’ (para. 192) is a welcome safe harbour for start-up acquisitions, consistent with emerging evidence that such deals are rarely anticompetitive (Ederer, Seibel, and Simcoe 2025; Manne, Bowman, and Auer 2022; Auer and Zúñiga 2026). We support it, with refinements.
First, the shield must be genuine: ‘does not find a SIEC’ should mean what it says. Second, its thresholds and the ‘three independent comparable rivals’ test must be precise enough for parties to self-assess.
Third—and most important—the shield withholds protection from ‘gatekeepers’ and the largest firms by status, routing their deals to the stricter entrenchment standard in Part II.B.7. That asymmetry imports Digital Markets Act-style, size-based regulatory presumptions into merger control. The concern is not that gatekeepers receive less protection. It is that case-specific merger analysis is distorted when a deal’s treatment turns on regulatory status rather than evidence of harm. Applied outside the Digital Markets Act’s institutional and legal context, such presumptions risk condemning the cross-market entry by which large firms discipline one another and deterring procompetitive scale-ups.
The framework must also be symmetric with the dynamic-efficiency analysis in Part II.C. The same capability combinations that may reduce innovation competition are frequently the largest source of dynamic efficiencies, including faster development, broader variety, and financing for stalled projects. A loss-of-innovation theory premised on developments years in the future must be matched by innovation efficiencies assessed over the same horizon and under the same standard. Crediting speculative harm readily while treating benefits grudgingly would reproduce the ‘innovation paradox’ (Gürkaynak 2023) and chill the very innovation the draft seeks to protect.
ICLE supports recognising potential-competition harm where it is real: where actual competitors impose no effective constraint (para. 195), the target is uniquely placed to enter, and no other potential entrant remains (para. 194). Eliminating a likely, timely, capability-backed entrant in those conditions can harm competition, and the framework rightly permits intervention.
The draft distinguishes two limbs: an ‘actual constraint’, where the incumbent is already reacting to the threat (para. 196), and a ‘future constraint’, where the entrant has the ability and incentive to enter in the foreseeable future (para. 200). These track the established perceived and actual potential-competition doctrines, and both can be genuine.
Two disciplines should be explicit. First, the actual-constraint limb must not rest on the incumbent’s subjective perception alone. The draft helpfully conditions that limb on objective evidence of feasible entry and disapplies it where the entrant is ‘objectively unable to enter’ (para. 197). That objective anchor should be a necessary condition, not one factor among many.
Second, paragraph 202’s statement that ‘specific entry plans’ are ‘not necessary’, together with its relaxed posture for fast-moving markets, risks converting hypothetical entry into presumed entry. Because potential-competition harm is inherently probabilistic, its strength must scale with the likelihood and timeliness of entry, predicted ‘with a reasonable degree of certainty’ (para. 206) and to the demanding standard the Court requires for prohibitions.
Crucially, not all acquisitions of potential competitors are harmful. Many are procompetitive. Where the target cannot enter effectively, where the merger combines complementary capabilities, or where it gives a capital-starved firm the resources to scale, the deal is likely to enhance competition and innovation. A vibrant acquisition market is itself an input to venture financing and entrepreneurship: the prospect of acquisition is often the principal route to liquidity and a key reason early-stage innovation is financeable (Manne, Bowman, and Auer 2022; Draghi 2024).
Nor should the ‘killer acquisition’ concern, addressed in the Draft Guidelines under loss of innovation (fn. 258), be generalised into a presumption. Its empirical base is industry specific. Even in pharmaceuticals, only 5–7 per cent of acquisitions plausibly fall into a ‘killer acquisitions’ category (Cunningham, Ederer, and Ma 2021). The evidence does not transfer to digital markets, where innovation is faster and often complementary rather than substitutive. In the Commission’s own information-and-communications-technology merger cases, no transaction was followed by the disappearance of the target’s products or by reduced entry or innovation (Ivaldi, Petit, and Ünekba? 2025). And a study of 1,200 technology acquisitions—co-authored by an originator of the killer-acquisition empirical work—finds that post-acquisition patenting tends to rise, not fall (Ederer, Seibel, and Simcoe 2025). Distinguishing a genuine ‘kill’ from ordinary integration is also methodologically fraught, so a digital killer-acquisition presumption would invite false positives (Manne 2020).
The right posture is an ability-incentive-effect inquiry applied to the counterfactual. Would the merged firm profitably shelve or degrade the target’s offering? Would doing so raise long-run profits net of efficiencies? Would consumers be worse off than in the realistic counterfactual—which, for many start-ups, is struggle to scale or outright failure, not independent success? Where elimination of nascent competition is feasible and profitable, the framework already permits intervention. Where procompetitive explanations dominate, blocking the deal sacrifices efficiencies and raises the risk of costly false positives (Manne 2020). The Guidelines should state that potential-competition harm is one explanation among several and often not the most probable.
Finally, the ‘reverse killer acquisition’ variant—that the acquirer would itself have entered but now will not—is doubly speculative. It requires the Commission to predict both foregone independent entry and the shelving of the combined capability, in tension with the recognition that combining complementary capabilities is usually procompetitive. The theory should require concrete, contemporaneous evidence of an abandoned entry plan that the merged firm has the ability and incentive to shelve, weighed against integration efficiencies.
By symmetry with Part II.A.4 on countervailing factors, the evidentiary bar for treating a firm as a lost potential competitor should equal the bar for crediting its prospective entry as a countervailing constraint.
We strongly support the draft’s retention of the ability-incentive-effect framework for foreclosure (paras. 208–251). It is the correct organising test and reflects both the case law and the modern empirical record. Unlike horizontal mergers, non-horizontal mergers do not automatically eliminate a competitor. Foreclosure harm depends on a subsequent strategic choice that must be feasible and profitable. By contrast, the efficiencies of vertical integration—especially the elimination of double marginalisation (EDM)—are frequently automatic and often arise where foreclosure risk is alleged to be highest (Cooper et al. 2005; Lafontaine and Slade 2007; Crawford et al. 2018).
We welcome the draft’s insistence that both ability and incentive be established, with incentive analysed using profitability-based tools. The Commission should make explicit that ‘foreclosure shares’ or vertical-concentration measures cannot establish a theory of harm absent an incentive story grounded in profitability. Converting such screens into presumptions would contradict the framework the draft endorses.
EDM and other verifiable, merger-specific efficiencies should be evaluated within the same arithmetic as the foreclosure analysis, not at a separate stage where they are easily discounted.
Two refinements would help. First, input and customer foreclosure should remain analytically distinct. Input foreclosure requires upstream power sufficient for input degradation materially to raise rivals’ costs. Customer foreclosure requires that the downstream affiliate account for such a large share of demand that its withdrawal denies upstream rivals efficient scale. A merger may raise one concern without raising the other.
Second, the incentive inquiry must account for recoupment across both levels. Foreclosure is profitable only if downstream gains exceed upstream losses, net of diverted sales and customers’ ability to sponsor entry or switch. Most vertical mergers are cleared (Lafontaine and Slade 2007).
The draft extends the analysis to dynamic effects, including foreclosure of innovation inputs—such as data, intellectual property, or platforms—on which rivals’ future innovation depends. We agree this is conceptually possible. Placing a critical, irreplaceable input under unitary control and restricting access can impair rivals’ innovation; the abandoned Nvidia/Arm deal is a frequent illustration. But the analysis must turn on how critical and irreplaceable the input is, and whether rivals can use alternatives, build their own, acquire substitutes, or innovate around it.
The mere addition of an element to a portfolio—whether ‘financial strength’, as in GE/Honeywell, or breadth, as in Booking/eTraveli—should not suffice (Teece 1986).
We caution against paragraph 251’s treatment of ‘diagonal’ mergers as presumptively unlikely to generate efficiencies. Many such combinations—including the AI partnerships now reshaping the industry—supply complementary capital, compute, and distribution that let targets scale, with no concrete evidence of foreclosure to date (Auer and Zúñiga 2026). A category-level presumption is inconsistent with the evidence and with the draft’s own recognition that mergers without head-to-head overlap have stronger integration potential (para. 17).
Those AI partnerships test the framework. Cloud providers supplying compute to AI labs involve the input dependencies a dynamic-foreclosure theory targets. Yet the record shows theoretical concerns but no concrete foreclosure. On balance, these arrangements have expanded competition by financing capital-starved entrants. The test must be applied to the facts: whether the input is truly scarce and irreplaceable, whether withholding would be profitable, and whether rivals have alternatives. Harm should not be inferred from structure. A firm that has just paid to strengthen a partner ordinarily has an incentive to see it succeed, not foreclose it.
Dynamic theories also carry a temporal hazard. They depend on a chain of predictions: that an input will remain scarce, that no substitute will emerge, that the merged firm will withhold it, and that rivals cannot adapt. Each link compounds the uncertainty. Interoperability and data-portability obligations, open standards, and ordinary entry of substitutes often dissolve the scarcity on which the theory rests. Where the Commission cannot predict with confidence that an input will remain a durable bottleneck, the theory should not carry the case.
Finally, where a foreclosure concern is made out, access and nondiscrimination commitments can often address it at far lower cost than prohibition while preserving integration efficiencies. Consistent with proportionality, the Commission should prefer the least restrictive effective remedy and should not treat prohibition as the default response to a contingent foreclosure theory.
Entrenchment is one of the draft’s most novel and legally precarious theories of harm. Under paragraph 252, entrenchment occurs when a merged firm gains control of assets that ‘structurally create or reinforce existing barriers to entry and expansion’, reducing contestability and deterring future entry, expansion, or innovation, whether within a ‘core market’ or across an interconnected ‘ecosystem’.
We do not dispute that a merger could, in principle, reinforce dominance by acquiring a genuinely critical, scarce, and non-replicable asset. But as drafted, the theory rests on concepts—‘ecosystem’, ‘core market’, ‘strategic’ assets, network effects, and customer inertia—that are too ill defined to deliver predictable outcomes. It risks condemning the ordinary accumulation of complementary capabilities that is competition on the merits.
The pivotal weakness is the ‘ecosystem’ construct (paras. 252–253). In competition law, ‘ecosystem’ largely operates as a descriptive label for dynamics already captured by established categories, such as aftermarkets, multisided platforms, and portfolio effects, rather than as a freestanding analytical framework (Colangelo 2026). EU practice bears this out: the term has been used loosely (Google Android), relegated to a footnote (Booking/eTraveli), and avoided by the Court (Android Auto). In practice, it has not influenced market definition, conduct assessment, or merger review.
Allowing dominance to be established across a loosely defined ‘ecosystem’ of ‘closely related markets’ would expand the theory beyond its proper bounds and undermine the work the dominance threshold is meant to do. We return to that concern in Part II.A.5.
Entrenchment should also be anchored in durability. Entrenched market power is power that is durable and hard to dislodge, shown by long-term evidence such as persistently stable shares or enduring barriers. It is distinct from merely substantial or current market power (Manne et al. 2024).
Equally important, network effects, scale economies, and customer inertia—the very ‘market dynamics’ paragraph 254 treats as making entrenchment more likely—are double-edged and frequently procompetitive. Network effects intensify competition for the market and rarely confer perpetual dominance absent exclusionary conduct. Markets that once looked entrenched have repeatedly been disrupted: MySpace by Facebook, Symbian and BlackBerry by iOS and Android, and incumbents by generative-AI entrants (Liebowitz and Margolis 1999; Evans and Schmalensee 2016). Treating these features as presumptive markers of entrenchment risks penalising successful firms. Acquiring complementary assets to improve an integrated offering is a normal mechanism of competition, not a structural harm.
If retained, the theory should be confined to four conditions. First, there must be a rigorously established, durable, pre-existing dominant position in a properly defined core market, not an aggregated ‘ecosystem’. Second, the acquired asset must be genuinely unique, scarce, or irreplaceable and important to competing in the core market, and rivals must be unable to replicate or work around it within a commercially relevant horizon. Third, the Commission must show a merger-specific mechanism by which contestability would actually fall—through higher barriers, deterred entry, or reduced innovation—causally tied to the transaction and predicted with the heightened certainty the Court requires for forward-looking harm (Tetra Laval). Fourth, the Commission must credit, symmetrically, the integration efficiencies that the same combination produces.
The draft’s own limiters—paragraph 255’s ‘no plausible connection’ and paragraph 258’s rival counterstrategies—point in this direction but are too loosely drawn. Without these limits, entrenchment becomes a roving commission to block complementary acquisitions by large firms, with substantial error costs and little predictability.
A further concern is that the theory risks importing into ex ante merger control the conduct-based concerns properly addressed, if at all, under Article 102 and the Digital Markets Act—without any conduct having occurred and without those regimes’ safeguards. Reinforcing a dominant position is not unlawful in itself. The law prohibits abusive conduct that exploits or extends dominance, and the Digital Markets Act already addresses the concern that the largest platforms may entrench themselves through conduct.
Layering a broad, structurally framed entrenchment theory on top raises a real risk of double regulation and of penalising firms for size and success rather than identifiable harm. The Commission should state expressly that entrenchment requires a merger-specific mechanism of harm, not merely the observation that a strong firm has become stronger.
The coordinated-effects framework in paragraphs 260–281—reaching terms of coordination, monitoring and deterring deviation, and resisting disruption—faithfully tracks the Airtours conditions and remains the right organising structure. We support its retention. Our comments concern the evidentiary burden and the calibration of the analysis to modern market features.
First, the Guidelines should be explicit about what evidence shows that a merger makes coordination ‘more likely than not’, consistent with CK Telecoms. It is not enough to recite that a market is concentrated, transparent, or symmetric. The Commission should specify which market facts move the needle: transparency sufficient to monitor deviations, symmetry of incentives and capacities, the elimination of a maverick, and the absence of effective outsider or buyer disruption. It should also identify what documentary or empirical evidence is required to establish each, particularly in differentiated-products settings or where algorithmic pricing is alleged to facilitate coordination. The broader empirical record is relevant context: most vertical and many horizontal combinations do not produce coordination, and the theory should not be applied on structural inference alone.
Second, the elimination-of-a-maverick strand connects to the ‘important competitive force’ concept and should be held to the same evidentiary discipline. We return to that concept in Part II.B.2.3. The Commission should require concrete evidence that the target in fact played a disruptive, coordination-defeating role, not merely that it had a modest share or a different business model. Differentiation is frequently the form competition takes, not evidence of its absence.
Third, the draft should retain a realistic account of the factors that disrupt coordination, including maverick rivals, lumpy or infrequent orders, heterogeneous costs, demand volatility, and the difficulty of sustaining tacit collusion in fast-moving or innovative markets. In dynamic settings, unstable market positions and the pace of innovation often make durable coordination implausible. The Commission should weigh those features symmetrically, rather than focusing only on conditions conducive to coordination.
We would add a specific note on algorithmic pricing, which the draft and contemporary enforcement increasingly invoke as a coordination facilitator. The economics are unsettled and frequently misunderstood. Pricing algorithms can intensify competition by speeding price discovery and lowering search and menu costs. The conditions under which they sustain genuinely collusive outcomes—as opposed to rapid competitive responses—are narrow and contested.
The Commission should not treat the use of common pricing software, or the technical possibility of algorithmic monitoring, as evidence of coordination risk. It should instead require concrete evidence that the merger makes a sustainable collusive equilibrium materially more likely. Coordinated-effects prohibitions have historically been, and should remain, demanding and comparatively rare, reflecting both the stringency of the Airtours conditions and the practical difficulty of sustaining tacit collusion.
The concern that a merger may give the merged entity access to rivals’ commercially sensitive information—particularly in vertically integrated settings—is legitimate but narrow. It has also historically been addressed effectively through behavioural commitments, such as information firewalls and ring-fencing.
The Guidelines should make clear that this theory requires evidence of three things: the information is genuinely competitively sensitive; the merged firm would have both the ability and incentive to exploit it to rivals’ disadvantage; and doing so would harm competition net of efficiencies. Where concerns are credible, targeted commitments should generally be preferred to prohibition. The mere possession of information by a vertically integrated firm, which is common and usually benign, is not itself a harm.
This theory overlaps substantially with both vertical foreclosure and the established rules on information exchange under Article 101. The Commission should not convert that overlap into a standing structural presumption. Access to a rival’s data becomes a competition concern only where the information is competitively sensitive, is not otherwise available through public sources, licensing, or the merged firm’s own operations, and could be deployed to the rival’s disadvantage in a way that harms competition net of efficiencies.
The Commission’s own practice illustrates the danger of stopping short of that inquiry. In General Electric/Alstom, the Commission observed that the merged entity could aggregate customer information on demand patterns relevant to continued innovation. But the mere capacity to aggregate information, which is common to any integrated supplier, is not itself a harm. The Commission must show that the information confers a durable advantage that rivals cannot replicate, and that the merged firm has both the ability and incentive to exploit it to foreclose—not merely that it would hold data its constituent businesses already possessed.
Where a credible concern is identified, it will often be amenable to a targeted behavioural remedy. Information firewalls, ring-fencing, and non-discrimination commitments have a long and effective track record in vertically integrated mergers precisely because the concern is narrow and the conduct it targets is severable from the integration’s efficiencies. Consistent with proportionality, prohibition should be reserved for the rare case in which no such commitment can neutralise the concern.
An overbroad information theory carries its own error cost. The routine information flows that accompany vertical integration—better demand forecasting, coordinated production planning, and the elimination of double marginalisation—are ordinarily procompetitive. A presumption against them would deter the very integration the draft elsewhere recognises as beneficial.
Portfolio effects have a long and cautionary history in EU merger control, from Guinness/Grand Metropolitan through the GE/Honeywell debate. The economic learning since then counsels scepticism. Bundling and a broad product range are frequently procompetitive: they can lower transaction costs and prices and improve the user experience. A theory that a firm will leverage a portfolio to foreclose rivals must overcome the same ability-incentive-effect hurdles as any foreclosure theory.
We are particularly concerned that ‘portfolio effects’ not become a relabelled ‘ecosystem’ theory. We return to that concern in Part II.B.7. Much of what the draft describes as ecosystem entrenchment is, in substance, the portfolio-effects analysis of the past. Importing that analysis without its hard-won limits would be a step backward.
The Commission should confine portfolio-effects theories to cases with concrete evidence that the combined portfolio confers the ability and incentive to foreclose, and that foreclosure would harm consumers net of the efficiencies that broad portfolios typically generate.
Taken together, both limbs of this subsection should be governed by the same discipline that applies to foreclosure generally: a concrete mechanism, ability and incentive grounded in profitability, an effect on competition net of efficiencies, and a strong preference for the least restrictive effective remedy where a concern is made out.
Neither access to information nor breadth of portfolio is, in itself, a harm. Each is a common and usually procompetitive feature of integrated firms. The risk we flag throughout these comments—that loosely framed, structurally inferred theories will sweep in benign conduct—is most acute for these ‘other’ effects precisely because they are open-ended. The Commission should anchor them firmly in the effects-based framework it endorses elsewhere.
The efficiencies chapter is, in our view, the draft’s most important improvement. It recognises a ‘theory of benefit’ (para. 25), distinguishes direct and dynamic efficiencies in parallel with direct and dynamic harms (para. 294), and, above all, insists that efficiencies be assessed with ‘an equivalent degree of likelihood over time’ as the harms they offset (para. 297).
Those changes respond directly to the long-standing critique that EU merger control has applied a ‘double standard’: demanding rigorous, quantified, near-term proof of benefits while constructing harms more freely and over longer horizons. We commend this reorientation and urge the Commission to carry it through consistently. The non-exhaustive list in paragraph 298—scale and scope economies, combinations of complementary assets and capabilities, procurement synergies, access to critical inputs, new, improved, or more affordable products, access to finance, better allocation of research-and-development resources, and enhanced ability and incentive to innovate—is sound and economically literate.
The single most important thing the Commission can do here is to mean what paragraph 297 says. Symmetry is not merely a matter of fairness. It is a matter of analytical coherence. If a dynamic harm premised on the discontinuation of a research-and-development project years in the future is cognisable, then a dynamic efficiency over the same horizon must be cognisable on the same terms. Conversely, parties should not be required to quantify and prove benefits to a standard the Commission does not apply to its own theories of harm.
We ask the Commission to add an explicit, operative statement that the standard of proof, the quality of evidence required, and the temporal horizon are identical for theories of harm and theories of benefit. The Commission should also commit, as paragraph 36 suggests, to early and good-faith engagement on efficiencies during the review.
This reform is consequential because the efficiency defence has, to date, been largely theoretical in EU practice. Although the 2004 framework nominally permitted efficiencies to be weighed, no merger has been cleared primarily on the strength of an efficiency defence. Practitioners have widely regarded the defence as something close to a dead letter, partly because of the demanding and asymmetric evidentiary burden, and partly because raising efficiencies was perceived as conceding the existence of harm (Padilla 2019).
The draft’s structural changes—an affirmative theory of benefit, parity of evidentiary and temporal standards, and encouragement of early engagement—are precisely what is needed to make the defence operative rather than ornamental. We therefore urge the Commission not only to adopt these provisions but also to signal, in its decisional practice, that a well-substantiated efficiency case can and will carry the day. A defence that exists on paper but never succeeds in practice does nothing for the competitiveness the draft seeks to promote.
The familiar trio of verifiability, merger specificity, and benefit to consumers (paras. 303, 309, 314) remains the right structure for direct efficiencies, and we support it. Our comments aim to ensure those criteria are applied in a way that does not, in practice, render the defence illusory, as has too often been the case.
Quantification is appropriately the gold standard. Cost data showing expected reductions in marginal or variable cost, or the achievement of minimum efficient scale, are persuasive forms of evidence. But the Commission should define minimum standards of proof by reference to the totality of the evidence and should accept that not all genuine efficiencies are precisely quantifiable ex ante. This is especially true of efficiencies arising from asset or capability combinations, which may be demonstrated through internal documents, premerger plans, independent expert studies, and past examples of realised efficiencies.
The same evidentiary discipline the Commission applies when it builds a theory of harm from internal documents and market evidence should suffice for efficiencies. A best-practices note on substantiating efficiencies, paralleling the notice on the submission of economic evidence, would materially help both parties and the Commission.
The merger-specificity test asks whether efficiencies could be achieved by less restrictive means, such as licensing or a joint venture. That test has intuitive appeal, but it should be applied with caution. From a transaction-cost perspective, so-called ‘less restrictive alternatives’ are often not less restrictive in practice. Contracts and joint ventures are costly to negotiate, implement, and monitor, and they create lock-in, hold-up, and rent-extraction risks that may lead firms to forgo the arrangement entirely—so the efficiency never materialises (Williamson 1985; Klein 1996).
Management research likewise treats partnerships and mergers as distinct organisational modes, not functional substitutes (Hagedoorn and Sadowski 1999). We welcome the draft’s recognition that a merger’s greater profitability than an agreement does not, by itself, defeat merger specificity, and that alignment of interests may be ‘very difficult’ (para. 312). The Commission should resist assuming that integration efficiencies can necessarily be replicated by contract.
The requirement that benefits accrue to ‘substantially the same consumers’ who would otherwise be harmed (para. 314) is, as drafted, quite narrow. The Commission should clarify how it will handle two recurring trade-offs.
The first is the intermediate-versus-final-consumer trade-off, especially in multisided markets where a merger may raise costs for business users while lowering prices or improving service for end users. Consistent with the Court’s emphasis on protecting consumers, such trade-offs are best resolved in favour of final consumers rather than edging toward a ‘trading-partner welfare’ standard.
The second is the out-of-market trade-off. Past practice has linked the consideration of out-of-market efficiencies to ‘considerable commonality’ between consumer groups (Mohan 2014). The Commission could usefully clarify when groups are sufficiently common to permit balancing.
The decisive practical question for pass-on is the degree of residual competitive pressure. Efficiencies are more likely to reach consumers where rivalry remains. In fast-moving markets, entry and potential competition often supply that pressure and explain why the efficiency-seeking transaction was undertaken in the first place.
One practical point cuts across all three criteria: they should be applied as a genuine, winnable defence, not as a series of hurdles each of which can be used to reject the claim. In particular, the Commission should avoid the pattern, common under the prior framework, of acknowledging an efficiency in principle while finding it insufficiently verifiable, insufficiently merger specific, or insufficiently likely to be passed on, with the cumulative effect that no efficiency ever quite qualifies.
Symmetry requires that each criterion be applied with the same realism, and the same tolerance for reasonable inference, that the Commission applies when assembling a theory of harm from comparable evidence. The burden on the parties is one of production and substantiation. Through the accretion of stringent subtests, it should not become a practical impossibility.
The express recognition of dynamic efficiencies—improved or new products, better distribution or production, and enhanced ability and incentive to invest and innovate—is especially valuable. Dynamic efficiencies are often the largest welfare gains a merger can produce, and they are systematically undervalued by frameworks built for static price effects.
We support the draft’s approach, including its acknowledgement that agreements such as joint ventures may, in some circumstances, not be realistic alternatives to a merger where dynamic efficiencies are concerned (para. 333). That is an important and correct concession to the transaction-cost and management literatures.
The principal risk is that the verification standard for dynamic efficiencies becomes more demanding than the standard the Commission applies to its own dynamic theories of harm. Paragraph 326 asks parties to ‘explain and substantiate with a sufficient degree of likelihood’ and ‘as concretely as possible’ the nature of the investment or innovation. If applied asymmetrically, that standard would reproduce the ‘innovation paradox’ and defeat the symmetry of paragraph 297.
Innovation is, by definition, uncertain and forward-looking. That uncertainty afflicts innovation theories of harm just as much as innovation efficiencies. It would therefore be incoherent to demand a higher evidentiary threshold for innovation efficiencies than for innovation harms (Padilla 2019).
The appropriate evidence is the same on both sides: the parties’ assets and capabilities, including research-and-development budgets, staff, facilities, and strategic plans; whether their research programmes overlap, enabling productivity gains, or are complementary, enabling synergies; business and integration plans; product-development forecasts; and independent expert studies. That evidence should be assessed in light of the market’s innovation cycle.
On timing, we support the draft’s preservation of an open-ended ‘timely’ standard rather than a fixed limit, and we urge the Commission to apply it with explicit symmetry. If the Commission accepts a theory of harm premised on the loss of a pipeline project several years from market, efficiencies expected over a comparable horizon must also be admissible.
The Commission has itself recognised divergent horizons in innovation cases, from one to two years in Novartis/GSK Oncology to nearly a decade in Dow/DuPont. The same case-by-case, life-cycle-sensitive calibration should govern efficiencies.
We also encourage the Commission to build ex post evaluation into its practice (Komninos and Petit 2021). Periodic reviews of past mergers would generate empirical evidence on when and how dynamic efficiencies materialise, strengthening future ex ante assessment and improving transparency.
To make dynamic-efficiency analysis concrete and predictable, the Commission should align it with the innovation framework in Part II.B.4 and with the innovation shield. Where a merger combines complementary research-and-development capabilities, supplies a capital-constrained innovator with the resources to bring a project to market, or internalises spillovers between adjacent research programmes, those should be cognisable dynamic efficiencies.
The evidence that establishes such efficiencies is the same evidence the Commission would examine to assess innovation harm: pipelines, capabilities, integration plans, and the market’s innovation cycle.
The Commission should also make clear that the dynamic efficiencies of vertical and conglomerate integration—improved coordination of complementary investments, faster iteration, and the elimination of double marginalisation that frees resources for further investment—are presumptively credible. That presumption would be consistent with the empirical record showing that such integration is, on balance, procompetitive (Lafontaine and Slade 2007; Crawford et al. 2018).
The balancing chapter is where the draft’s symmetry must become operational. We welcome much of its structure: the recognition that efficiencies need only ‘offset’ the harm (para. 339); the appropriate focus, in symmetric cases, on whether dynamic efficiencies offset dynamic harms (para. 345); and the willingness to use quantification tools, net-present-value analysis, and willingness-to-pay methods where the parameters are comparable (paras. 343, 347).
The draft’s use of risk-regulation logic—weighing both the likelihood and magnitude of effects across time (para. 341)—is a sensible way to compare near-term and distant effects without categorically discounting the latter.
We have two concerns. The first is the ‘margin of discretion’ the Commission reserves for balancing ‘incommensurable’ price and non-price parameters (para. 342). This is where the draft’s ambitions and its certainty objective most directly collide. How is the Commission to weigh, for example, a resilience benefit that may require excess capacity and thus static inefficiency against an efficiency harm? How should it weigh a sustainability benefit against a price increase? The draft supplies a vocabulary but not a method.
We do not suggest these trade-offs are easy. We suggest that unstructured discretion to resolve them is the opposite of the predictability paragraph 5 promises. At a minimum, the Commission should commit to a structured, transparent framework—likelihood, magnitude, timing, and the parameter affected—and should explain its weighting in each decision, so that the exercise is reviewable and learnable rather than ad hoc.
The second concern is the latent thumb on the scale in paragraphs 345–346. Those paragraphs suggest that where a merger produces both substantial harm and substantial benefit, the analysis should lean toward intervention because ‘competition is an important long-term driver of efficiency and innovation’ and lower residual competition reduces the incentive to maintain efficiencies. There is a kernel of truth here: pass-on depends on residual competitive pressure. But that point should not harden into a presumption against close cases.
Symmetry requires that genuine, well-evidenced substantial benefits be credited even when harms are also substantial. Otherwise, the ‘offset’ standard in paragraph 339 quietly becomes an asymmetric ‘clearly outweigh’ standard imposed on the parties alone. The cleaner and more defensible approach is to enlarge the Commission’s temporal and analytical horizon symmetrically—evaluating harms and benefits over the same timeframe and calibrating the weight of each strictly to the evidence—rather than discounting long-term benefits while entertaining long-term harms.
Finally, on balancing across different consumer groups or markets, we encourage the Commission to adopt a transparent and consistent rule. Where harmed and benefited consumers are largely the same group, balancing is straightforward. Where they differ—harm to one customer group or market, benefit to another—the draft should make explicit when out-of-market or cross-group benefits may be counted, building on the ‘considerable commonality’ approach of past practice (Mohan 2014).
Two principles should guide that analysis. First, in multisided markets, the relevant unit is the whole platform. A benefit to one side funded by a charge on another is therefore not properly characterised as a cross-market trade-off. It is an integral feature of a single product.
Second, where a genuine cross-group trade-off exists, the Commission should resolve it by reference to total consumer welfare in the affected markets, transparently and symmetrically. It should not privilege the harmed group in a way it would not privilege a harmed group when the roles are reversed on the benefit side. Consistency here is, once again, the route to predictability.
We welcome the draft’s defence of the ‘one-stop shop’ and the Commission’s exclusive competence over EU-dimension mergers (paras. 358–359). Both are important contributors to legal certainty, reduced administrative burden, and integration of the internal market. We also welcome the placement of the burden on member states to prove that any Article 21(4) measure pursues a genuine legitimate interest and complies with the general principles of EU law, including proportionality and nondiscrimination (paras. 360–362).
As a matter of principle, the Commission should read Article 21(4) narrowly and conservatively, and should continue to see through pretextual invocations of ‘public policy’ used to build national champions or shield domestic firms—as it did, for example, in resisting Italy’s attempt to block Vivendi/Mediaset. The value of Article 21(4) lies precisely in its exceptional character. Allowing it to expand would fragment the internal market the one-stop shop is designed to protect.
Codifying the Article 21(4) framework in the Guidelines usefully promotes predictability, provided the substantive bar remains high. The clearer the Commission is about what does—and does not—qualify as a legitimate interest, and about the evidentiary and proportionality showings member states must make, the less room there will be for Article 21(4) to be used as an industrial-policy or protectionist instrument.
The placement of legitimate-interest review in a narrow, tightly bounded carve-out reflects a sound constitutional logic that the Guidelines should make explicit. The EU Merger Regulation (EUMR) confers on the Commission a single, competition-based competence. Article 21(4) is the limited mechanism by which member states may protect a narrow set of non-competition interests, subject to EU oversight.
That structure exists to prevent the substantive competition assessment from becoming a vehicle for industrial policy, protectionism, or contested social objectives. That is precisely why the non-competition considerations that appear elsewhere in the draft—resilience, sustainability, and media and cultural diversity—are best handled, where legally cognisable at all, through this channel rather than absorbed into the significant impediment to effective competition (SIEC) analysis.
Confining such interests to Article 21(4), and policing that channel strictly, is the cleanest way to reconcile the draft’s broader ambitions with the certainty and neutrality of merger control.
We support the draft’s strict, case-law-grounded reading of public security. Public security must be interpreted narrowly, cannot be determined unilaterally by member states without EU control, may be invoked only against a ‘genuine and sufficiently serious threat to a fundamental interest of society’, and must not be misapplied to serve economic ends.
Paragraph 370 is particularly important: member states or their nationals are, prima facie, not a threat to another member state’s public security. Intra-EU mergers should therefore raise public-security concerns only exceptionally. The Commission should hold that line firmly.
The principal risk is that public-security and foreign-investment rationales will be used to block or redesign deals for protectionist reasons, as in aspects of GE/Alstom. The Guidelines should clarify when such interventions are, and are not, consistent with Article 21(4).
This is where we most strongly urge restraint. The draft’s framing is correct: the Commission assesses media-sector mergers ‘according to the same principles as mergers in other sectors’, taking diversity into account only where it is a relevant parameter of competition, while media-plurality review proper proceeds under the European Media Freedom Act and national law (paras. 373–374). We support that framing but caution against drift beyond it.
The EU Merger Regulation (EUMR) prevents abuses of market power. It is not a tool for regulating speech, editorial diversity, or viewpoint pluralism, and ‘democracy’ has never been a value it protects. No merger has been blocked for ‘harming democracy’, nor would the Treaties permit it. ‘Harm to democracy’ is contested, politically charged, and analytically unstable. The link between mergers, lobbying, and democracy is unsettled and rests on contestable modelling (Valletti and Broso 2024). Lobbying is, in any event, a recognised feature of democratic participation in the EU (Articles 10–11 TEU; the transparency register). Importing such an ill-defined goal would exceed the Commission’s mandate, require amendment of the EUMR and arguably the Treaties, and damage the predictability and neutrality of merger review.
Media plurality proper raises distinct difficulties that confirm it belongs with media-specific instruments. Measuring viewpoint diversity is far harder than assessing product choice. It requires defining, gauging, ranking, and prioritising opinions—normative judgments the Commission is neither mandated nor equipped to make. Nor do all media mergers reduce plurality. Diversification can be efficiency driven, and ‘more’ media is not always better given clutter, disinformation, and low-quality reporting.
Where the Commission does consider diversity, it should do so only as a genuine competition parameter, such as product variety and consumer choice. Editorial and viewpoint-pluralism concerns should be left to the European Media Freedom Act, national media laws, and—where a member state acts—the narrow Article 21(4) mechanism, approached with scepticism toward pretextual claims.
For Article 21(4) media-plurality claims, the Commission should apply clear filters. It should require demonstrable risks to diversity, not slogans about identity or sovereignty; market-wide impact, not firm-specific interest; and proof that citizens’ access to diverse information would meaningfully decline despite abundant channels. It should also insist on consistency with EU values and competition principles, including no shielding of inefficient or state-favoured firms, and should require transparency and proportionality. These filters would respect legitimate member-state interests while preventing Article 21(4) from creeping beyond its exceptional scope.
On ‘other public interests’ and general principles, including proportionality, nondiscrimination, and compatibility with other EU law, we support the draft’s insistence that member-state measures must pursue a real legitimate interest, must not constitute arbitrary discrimination or a disguised restriction on free movement of capital or freedom of establishment, and must be suitable and proportionate.
The Commission should resist broadening the recognised-interest categories. It should treat increased market power vis-à-vis public authorities, or other diffuse ‘public interest’ concerns, as outside its mandate where they are untethered to a competitive effect on consumers in a relevant market. Clear, law-based boundaries protect both the integrity of the EUMR framework and the legitimate prerogatives of member states.
The procedural framework for Article 21 review—notification and standstill, the range of possible Commission decisions, and the interaction with other EU-law proceedings (paras. 390–399)—is a useful codification. We support clarifying the procedure by which member-state measures affecting EU-dimension mergers are assessed.
Predictable procedure is itself a contributor to legal certainty. The Commission should be explicit about timelines, the evidentiary submissions it expects from member states, and the consequences of failing to substantiate a claimed legitimate interest, including the Commission’s power, reflected in paragraph 362, to find an infringement of EU law.
We offer two observations. First, the procedural rules should reinforce the substantive discipline of Part III.A. A member state invoking a legitimate interest should bear a clear, front-loaded burden to identify the specific risk and provide specific evidence, so that pretextual or protectionist measures can be filtered early.
Second, the Guidelines should clarify the relationship between parallel national review—for example, a media-plurality review under national law implementing the European Media Freedom Act, or foreign-investment screening—and the Commission’s EUMR assessment. Firms should understand which proceedings apply, in what sequence, and with what standstill consequences. Coordination and sequencing clarity would reduce duplication, avoid staggered review, and protect the one-stop shop the draft rightly defends.
In closing, we reiterate our overarching message. The Draft Guidelines contain genuine and welcome advances: symmetry between harm and benefit, a dedicated and more sophisticated treatment of innovation and dynamic competition, the innovation shield, and a candid recognition that most mergers are procompetitive. Those advances will deliver their promised benefits only if the instrument resists the temptation to do everything at once.
We respectfully encourage the Commission, in its next draft, to pair its ambitions with clear, administrable rules: soft structural screens rather than presumptions; symmetric evidentiary and temporal standards for harms and benefits; tightly bounded and well-defined dynamic theories of harm; and a disciplined, narrow treatment of non-competition objectives. That is the surest way to honour the draft’s own promise, in paragraph 5, to increase legal certainty and predictability—and, in doing so, to advance the competitiveness of the internal market.
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Scholarship (Affiliate) Abstract The Hart-Scott-Rodino (HSR) Act requires firms to notify the U.S. antitrust agencies of acquisitions that exceed size thresholds. We study the economic consequences of . . .
The Hart-Scott-Rodino (HSR) Act requires firms to notify the U.S. antitrust agencies of acquisitions that exceed size thresholds. We study the economic consequences of the 2000 HSR Amendments, effective in 2001, which raised the minimum reporting threshold from $15 to $50 million, as adjusted, and removed the percentage-of-shares trigger, exempting many smaller transactions from review. Using SDC/Refinitiv transaction data, annual HSR reports, and Census Business Dynamics Statistics, we construct an industry-level measure of exposure to the reform and compare more-and less-exposed industries over the following two decades. We document three stylized facts: the HSR reform is associated with a shift in the composition of recorded acquisitions toward larger, same-industry, and repeated-acquirer deals; these responses differ sharply between goods-producing and service industries; and so do the accompanying changes in industry and labor-market dynamics.
Read the full piece at here.
Popular Media (ICLE) La Commission européenne a dévoilé le 3 juin dernier son « paquet pour la souveraineté technologique » : une série de mesures visant à réduire . . .
La Commission européenne a dévoilé le 3 juin dernier son « paquet pour la souveraineté technologique » : une série de mesures visant à réduire la dépendance de l’Europe dans les semi-conducteurs, le cloud et l’intelligence artificielle.
L’intention est légitime. Les moyens, eux, mènent à l’inverse du but recherché. Hayek le rappelait, c’est souvent au nom des meilleures intentions que l’on s’engage sur la route de la servitude. En croyant bâtir sa souveraineté, l’Europe est en train de paver la sienne — numérique cette fois.
[The European Commission unveiled on June 3 its “technological sovereignty package”: a series of measures aimed at reducing Europe’s dependence in semiconductors, cloud computing, and artificial intelligence.
The intention is legitimate. The means, however, lead to the opposite of the intended goal. Hayek reminded us that it is often in the name of the best intentions that one sets out on the road to serfdom. In believing it is building its sovereignty, Europe is paving its own road — this time digital.]
TOTM Smartphones are no longer just phones. For kids, they are libraries, newspapers, classrooms, cameras, maps, town squares, and, yes, bottomless distraction machines. Texas Senate Bill . . .
Smartphones are no longer just phones. For kids, they are libraries, newspapers, classrooms, cameras, maps, town squares, and, yes, bottomless distraction machines. Texas Senate Bill 2420 treats access to all of it as something that should first pass through a state-mandated checkpoint.
Also known as the App Store Accountability Act, SB 2420 is currently facing a major constitutional challenge before the 5th U.S. Circuit Court of Appeals. The consolidated cases—Students Engaged in Advancing Texas (SEAT) v. Paxton and Computer & Communications Industry Association (CCIA) v. Paxton—pit challengers against Texas Attorney General Ken Paxton and place the intersection of free speech and government regulation of technology platforms squarely before the court.
SB 2420 requires app stores to verify the age of every user and mandates that minors obtain individualized parental consent before downloading or purchasing any app.
Texas argues that the law merely strengthens parental authority. The U.S. District Court for the Western District of Texas was unconvinced. As the district court explained:
The Act is akin to a law that would require every bookstore to verify the age of every customer at the door, and for minors, require parental consent before the child or teen could enter and again when they try to purchase a book.
The case is now on appeal before the 5th Circuit. The International Center for Law & Economics (ICLE) filed an amicus brief supporting the plaintiffs and arguing that SB 2420 violates the First Amendment. The brief’s distinctive contribution is to connect First Amendment doctrine with an underlying law & economics framework, building on my prior ICLE issue brief, “A Coasean Analysis of Online Age-Verification and Parental-Consent Regimes,” as well as several earlier Truth on the Market posts examining app-store age-verification requirements.
Amicus Brief Identity of Amicus Curiae, Interest in This Matter, and Source of Authority to File The International Center for Law & Economics (“ICLE”) is a nonprofit, . . .
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 in 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 the First Amendment, protecting minors online, and age-verification and parental-consent laws, including white papers, law journal articles, regulatory comments, and amicus briefs.
ICLE is authorized to file this brief by Fed. R. App. P. 29(a)(2) because all parties have consented to its filing. No party’s counsel authored any part of this brief. No other party’s counsel authored any part of this brief or contributed money intended to fund the brief’s preparation or submission.
Smartphones are ubiquitous, even for minors. Parents have largely chosen to purchase and activate smartphones for their children, even though such a decision comes with costs as well as benefits. The revealed preferences of both parents and their children is that the benefits of smartphones far outweigh their cost on net. Smartphones, including through the use of apps downloaded through app stores, enable minors to participate in the marketplace of ideas by receiving information and ideas, as well as speaking themselves.
Nonetheless, it is true that there are potential harms from using particular apps, including for minors. The question from a law & economics perspective is who are the “least-cost avoider(s)” of those harms. Liability should be imposed upon the party or parties best positioned to deter the harms in question, such that the costs of enforcement do not exceed the social gains realized. See Harold Demsetz, When Does the Rule of Liability Matter?, 1 J. Leg. Stud. 13, 28 (1972) (“A deeper analysis [of cases assigning liability] may reveal that that they generally make sense from an economic viewpoint of placing the liability on that party who can, at least cost, reduce the probability of a costly interaction happening.”). One of the major costs of imposing the duty to avoid harm upon the wrong party in cases involving speech is that doing so could result in collateral censorship.
Texas Senate Bill 2420, the App Store Accountability Act (“SB 2420”), was designed to enhance parental authority by requiring app stores to verify the age of all users and obtain parental consent for downloads and purchases by minors. This shifts the burden to app stores, in the first instance, to avoid the harms associated with smartphone usage by imposing liability if they do not age-gate access to apps by restricting the ability of minors to download or purchase them without obtaining individualized parental consent. This results in collateral censorship because it restricts minors from 1) accessing protected speech on apps, and 2) engaging in speech of their own on apps. For instance, a minor couldn’t download an app to learn about current events from The New York Times, check the weather on The Weather Channel, look up a word in the Mirriam-Webster Dictionary, read the Bible on YouVersion, play Paw Patrol Rescue Academy, or create speech of their own on YouTube or Instagram—without parental approval first.
This is a broad restriction upon speech that can’t be squared with the First Amendment. “Minors are entitled to a significant measure of First Amendment protection, and only in relatively narrow and well-defined circumstances may government bar public dissemination of protected materials to them.” Brown v. Ent. Merchants Ass’n, 564 U.S. 786, 794 (2011) (quoting Erznoznik v. Jacksonville, 422 U.S. 205, 212-13 (1975)). “Speech that is neither obscene as to youths nor subject to some other legitimate proscription cannot be suppressed solely to protect the young from ideas or images that a legislative body thinks unsuitable for them.” Id. at 795 (quoting Erznozik, 422 U.S. at 213-14).
SB 2420 goes far beyond these narrow and well-defined circumstances because it restricts minors’ access to First Amendment-protected speech. As the District Court rightly put it, “The Act is akin to a law that would require every bookstore to verify the age of every customer at the door, and for minors, require parental consent before the child or teen could enter and again when they try to purchase a book.” Students Engaged in Advancing Texas v. Paxton, 814 F. Supp. 3d 769, 777 (W.D. Tex. 2025) (“SEAT”); Computer & Commc’ns Indus. Ass’n v. Paxton, 814 F. Supp. 3d 787, 794 (W.D. Tex. 2025) (“CCIA”).
Texas asserts that SB 2420 is a mere regulation on commercial speech which should be subject to intermediate scrutiny at most. Like states defending age-verification and parental-consent requirements to create a social media profile, Texas argues that SB 2420 regulates the ability of minors to enter into contracts with app stores and developers without parental consent. For good reason, federal courts have consistently rejected this argument. See, e.g., NetChoice, LLC v. Yost, 778 F. Supp. 3d 923, 950 (S.D. Ohio 2025) (“[A] law prohibiting minors from contracting to access [] a plethora of protected speech cannot be reduced to a regulation of commercial conduct.”); NetChoice, LLC v. Griffin, 2025 WL 978607, at *8 (W.D. Ark. Mar. 31, 2025); NetChoice v. Carr, 789 F. Supp. 3d 1200, 1221 (N.D. Ga. 2025).
On the contrary, profit-driven firms involved in the creation or distribution of speech are protected by the First Amendment. See 303 Creative LLC v. Elenis, 600 U.S. 570, 600 (2023) (“[T]he First Amendment extends to all persons engaged in expressive conduct, including those who seek profit.”). And minors have a right to participate in the marketplace of ideas, including as purchasers and receivers of speech, like apps. See Brown, 564 U.S. at 794-95 (government has no “free-floating power to restrict ideas to which children may be exposed”). Accessing speech through apps on a smartphone is part of the modern marketplace of ideas. See Packingham v. North Carolina, 582 U.S. 98, 107 (2017) (describing the Internet as “the modern public square” where citizens can “explor[e] the vast realms of human thought and knowledge”). When a law is designed to restrict access to protected speech, intermediate scrutiny is inappropriate. The District Court correctly applied strict scrutiny.
Parents and minors are the least-cost avoiders of harms from smartphone usage, as they can already use technological and practical means to avoid or limit the use of particular apps they judge to be harmful. Cf. Ben Sperry, A Coasean Analysis of Online Age-Verification and Parental-Consent Regimes (ICLE Issue Brief, Nov. 9, 2023).[1] But SB 2420 goes far beyond enhancing parental authority by instead imposing “governmental authority, subject only to a parental veto.” Brown, 564 U.S. at 795, n.3 (emphasis in original). “Restrict[ing] almost all apps and content within apps” in order to “prevent minors from accessing the subset of apps which contain harmful material” is not the “least restrictive means” to stop minors from accessing harmful material. SEAT, 814 F. Supp. 3d at 783; CCIA, 814 F. Supp. 3d at 801. This would likely lead to considerable collateral censorship not only for minors, but also adults who do not wish to provide the necessary means to have their age verified. The law is also under-inclusive because minors could still access the same purportedly dangerous content available through apps by pre-loaded browsers like Safari or Chrome. Cf. Brown, 564 U.S. at 802.
A less speech-restrictive approach to protecting minors would be to promote voluntary content filters and application blockers and to educate parents and minors on how to use such tools to avoid harms from particular apps. SEAT, 814 F. Supp. 3d at 783; CCIA, 814 F. Supp. 3d at 801. This would promote the ability of parents and minors to avoid or mitigate harm from particular apps at a much lower social cost than restricting access to protected speech for minors. Demand for such tools in the marketplace has led app stores to already provide substantial resources for parents to use. Accordingly, the District Court correctly found that age-verification and parental-consent requirements were not the least restrictive means to protecting minors.
For the same reasons, SB 2420 would also fail intermediate scrutiny. It is clear there is no justification for the law unrelated to speech, and it burdens substantially more speech than necessary.
The District Court should be affirmed.
Under the First Amendment, minors have a right to participate in the marketplace of ideas. While they may not have all the rights to access speech that adults do, they receive a “significant measure of First Amendment protection, and only in relatively narrow and well-defined circumstances may government bar public dissemination of protected materials to them.” Brown v. Ent. Merchants Ass’n, 564 U.S. 786, 794 (2011) (quoting Erznoznik v. Jacksonville, 422 U.S. 205, 212-13 (1975)). It is true that age-verification requirements to access speech may not always trigger strict scrutiny—for instance, if the speech is unprotected as to minors, like obscenity, that would be one of those narrow and well-defined circumstances. See Free Speech Coal., Inc. v. Paxton, 606 U.S. 461, 482 (2025). But if the speech is protected as to minors, a content-based law is subject to strict scrutiny. See id. at 493 n.12 (agreeing with the dissent that “for fully protected speech, the distinction between bans and burdens makes no difference to the level of scrutiny.”) (emphasis in original).
A law can be content-based either “‘on its face’ or in its justification.” Id. (quoting Reed v. Town of Gilbert, Ariz., 576 U.S. 155, 163 (2015)). The District Court correctly found SB 2420 was content-based for both reasons.
First, SB 2420’s coverage definition excludes certain apps based on content. It exempts from parental-consent requirements apps that provide “direct access to emergency services,” and apps operated by a nonprofit that administers a standardized college-admission test. A statute that gates a minor’s access to The New York Times app but waves through an SAT-prep app is regulating based upon particular subject matter as well as function or purpose. SEAT, 814 F. Supp. 3d at 781; CCIA, 814 F. Supp. 3d at 799 (Minors “would not face a barrier accessing an app from the College Board and would be unable to access an app from a newspaper.”); cf. Reed, 576 U.S. at 163. These carve-outs also defeat any effort to recast the Act as a neutral regulation of commercial conduct: a genuine commercial regulation would not turn on whether an app delivers emergency information or college-entrance testing. The defect is thus not that Texas seeks to empower parents, but that the mechanics it chose create favored (and disfavored) categories of protected speech.
Second, the justification for SB 2420 is to “shield minors from certain speech the State deems objectionable or harmful (as Texas acknowledged at the hearing).” SEAT, 814 F. Supp. 3d at 781; CCIA, 814 F. Supp. 3d at 799. Texas’s attempt to rebrand SB 2420 as privacy legislation fails on its face. SB 2420 does not regulate the terms and conditions of app stores or apps on data collection or use. It only restricts how those entities can use age-verification data, which is an implicit admission that age verification itself comes with privacy issues.
At base, SB 2420 restricts First Amendment-protected speech for minors by requiring age verification and parental consent for each app download or in-app purchase. SEAT, 814 F. Supp. 3d at 777; CCIA, 814 F. Supp. 3d at 794 (“The Act is akin to a law that would require every bookstore to verify the age of every customer at the door, and for minors, require parental consent before the child or teen could enter and again when they try to purchase a book.”). These restrictions violate the rights of minors to participate in the marketplace of ideas, both as purchasers and receivers of speech in apps. See Brown, 564 U.S. at 794-95 (government has no “free-floating power to restrict ideas to which children may be exposed”).
On appeal, Texas asserts that SB 2420 only regulates speech that proposes a commercial transaction, and therefore the District Court was wrong to apply strict scrutiny. The argument is that app stores are commercial in nature because they require users to agree to terms of service, which include privacy and data collection policies that may allow such data to be monetized either by app stores or by the apps under their own terms of service. SB 2420 is therefore only regulating the ability of minors to enter into these contracts and should be subject to intermediate scrutiny. In sum, they argue app stores can’t avoid reasonable regulation to protect minors from potentially harmful contracts simply because they condition access to speech in apps on accepting those contracts.
This is wrong for two fundamental reasons.
First, the fact that app store transactions are commercial in nature does not, by itself, reduce First Amendment protections in the marketplace of ideas. A bookstore does not forfeit First Amendment protection because it sells books, nor does a newspaper because it sells subscriptions; an app store is no different merely because some apps are distributed for a price. See 303 Creative LLC v. Elenis, 600 U.S. 570, 600 (2023) (“[T]he First Amendment extends to all persons engaged in expressive conduct, including those who seek profit.”). Commercial speech is speech that “proposes a commercial transaction.” Bd. of Trs. of State Univ. of New York v. Fox, 492 U.S. 469, 482 (1989). But this doctrine has never been expanded into a blanket classification that subjects every business distributing protected speech for profit to diminished scrutiny. Cf. Riley v. Nat’l Fed’n of the Blind of N.C., 487 U.S. 781, 795 (1988) (noting it is “not clear” that “speech is necessarily commercial whenever it relates to that persons’ financial motivation for speaking.”).
On the supply side of this marketplace, app stores have the right of editorial discretion over which third-party apps they include. Cf. Moody v. NetChoice, LLC, 603 U.S. 707, 731 (2024) (“Deciding on the third-party speech that will be included in or excluded from a compilation—and then organizing and presenting the included items—is expressive activity of its own. And that activity results in a distinctive expressive product.”). On the demand side, minors have the right to contract for protected speech that can only be overcome when the government satisfies strict scrutiny. See Brown, 564 U.S. at 794 (rejecting an invitation to apply intermediate scrutiny to a whole “new category of content-based regulation… only for speech directed at children”). Together, this means that money or data being exchanged for access to content does not reduce First Amendment scrutiny on restrictions to protected speech.
Second, this argument fundamentally misunderstands the nature of multi-sided platforms like app stores. The Supreme Court has recognized that multi-sided platforms require an intermediary (like an app store) to balance the interests of each side to maximize the platform’s value. See Ohio v. American Express Co., 585 U.S. 529, 534-537 (2018). This may mean, for many apps, that they can offer free or reduced-price downloads to users because of the data collection that empowers targeted advertising. This is to the benefit of users, including minors, who would otherwise have to pay more for apps.
Sometimes, commercial speech can be “inextricably intertwined” with fully protected speech, making a restriction subject to strict scrutiny. See Riley, 487 U.S. at 796; Dex Media West, Inc. v. City of Seattle, 696 F.3d 952, 958 (9th Cir. 2012). This is precisely the case here where data collection for targeted advertising is inextricably intertwined with providing free or reduced-price access to speech in apps.
For instance, in Dex Media West, the Ninth Circuit considered yellow page directories and found that the protected speech of the phonebooks (i.e. telephone numbers) was inextricably intertwined with the advertisements that help fund it. See 696 F.3d at 956-65. The court found the “[e]conomic reality” that “yellow pages directories depend financially upon advertising does not make them any less entitled to protection under the First Amendment.” Id. at 963-64. The court rejected the district court’s conclusion that “economic dependence was not sufficient to intertwine commercial and noncommercial elements of the publication,” id. at 964, as the same could be said of television stations or newspapers as well, but they clearly receive full First Amendment protection for their speech. Id. at 965.
Here, this means the court should consider the interconnected nature of the free or reduced-price access to the speech in apps empowered by data collection for targeted advertising. App stores are, in this sense, indistinguishable “from newspapers, magazines, television programs, radio shows, and similar media…” that curate “noncommercial content in order to reach a broader audience and attract more advertising.” Id.
Moreover, it is worth noting that federal courts have consistently rejected the “contract regulation” argument in the context of social media age-verification and parental-consent requirements. See, e.g., NetChoice, LLC v. Yost, 778 F. Supp. 3d 923, 950 (S.D. Ohio 2025) (“[A] law prohibiting minors from contracting to access [] a plethora of protected speech cannot be reduced to a regulation of commercial conduct.”); NetChoice, LLC v. Griffin, 2025 WL 978607, at *8 (W.D. Ark. Mar. 31, 2025); NetChoice v. Carr, 789 F. Supp. 3d 1200, 1221 (N.D. Ga. 2025).
There is no principled basis for distinguishing app stores providing access to speech from social media platforms. On the contrary, accessing speech through apps on a smartphone is part of the modern marketplace of ideas. See Packingham v. North Carolina, 582 U.S. 98, 107 (2017) (describing the Internet as “the modern public square” where citizens can “explor[e] the vast realms of human thought and knowledge”).
SB 2420 restricts minors’ access to protected speech; therefore intermediate scrutiny is inappropriate. The District Court application of strict scrutiny should be affirmed.
Under strict scrutiny, a law must be “the least restrictive means of achieving a compelling state interest.” Free Speech Coal., 606 U.S. at 471 (quoting McCullen v. Coakley, 573 U.S. 464, 478 (2014)).
To be a compelling interest, the state must “specifically identify an ‘actual problem’ in need of solving.” Brown, 564 U.S. at 799 (internal citation omitted). In Brown, the Supreme Court found that California’s evidence linking exposure to violent video games and harmful effects on children was “not compelling” because it did “not prove that violent video games cause minors to act aggressively.” Id. at 800 (emphasis in original).
The same is true here. “[N]othing suggests Texas’s interest in preventing minors from accessing a wide variety of apps that foster protected speech (such as the Associated Press, the Wall Street Journal, Substack, or Sports Illustrated) is compelling.” SEAT, 814 F. Supp. 3d at 782; CCIA, 814 F. Supp. 3d at 800.
But even assuming there is a compelling state interest in protecting minors from harms associated with app store usage, SB 2420 is not “the least restrictive means among available, effective alternatives.” Ashcroft v. ACLU, 542 U.S. 656, 666 (2004).
Scholars have argued Supreme Court precedent considering speech regulation to protect children has followed a least-cost avoider analysis, specifically when evaluating whether the government has employed the least restrictive means to achieve a compelling government interest. See Ben Sperry, A Coasean Analysis, supra, at 6 (“[T]he Court appears implicitly to have used Coasean analysis in understanding who should bear the burden of avoiding harms associated with speech platforms.”).
In brief, the Coase Theorem states 1) that the problem of externalities is bilateral; 2) in the absence of transaction costs, resources will be allocated efficiently, as the parties bargain to solve the externality problem; 3) in the presence of transaction costs, the initial allocation of rights does matter; and 4) In such cases, the burden of avoiding the externality’s harm should be placed on the lowest-cost avoider, while taking into consideration the total social costs of the institutional framework. Id. at 3.
Here, this means that there are negative externalities due to minors using apps downloaded from an app store—which exist because minors have smartphones. If there were no transaction costs, it wouldn’t matter if the app stores have a duty to gain parental consent first or not because the bargain would come out the same. But in the real world, there are transaction costs, even if they are push notifications on a phone. Thus, placing the burden on app stores to gain parental consent before the download of each individual app will result in some degree of collateral censorship for minors, likely even beyond the desires of the parent. In sum, if parents and minors can avoid the harms associated with particular apps at lower cost through using available technology and other means, then there is no basis for imposing age-verification and parental-consent laws.
Texas justifies SB 2420 on the basis empowering parents to make decisions on behalf of their children. But SB 2420 goes far beyond enhancing parental authority by instead imposing “governmental authority, subject only to a parental veto.” Brown, 564 U.S. at 795, n.3 (emphasis in original). Restricting minors’ access to all apps is dangerously close to “punishing third parties for conveying protected speech to children just in case their parents disapprove of that speech”—which the Supreme Court has determined is not “a proper governmental means of aiding parental authority.” Id. at 802 (emphasis in original). This is because “[n]ot all of the children who are forbidden” from downloading apps “on their own have parents who care” whether they download those apps. Id. at 804 (emphasis in original).
The District Court correctly found that “[r]estrict[ing] almost all apps and content within apps” in order to “prevent minors from accessing the subset of apps which contain harmful material” is not the “least restrictive means” to stop minors from accessing harmful material. SEAT, 814 F. Supp. 3d at 783; CCIA, 814 F. Supp. 3d at 801. The means chosen by Texas are both seriously over- and under-inclusive. Cf. Brown, 564 U.S. at 805 (when a government end is legitimate but they affect “First Amendment rights they must be pursued by means that are neither seriously underinclusive nor seriously overinclusive.”).
As mentioned above, restricting access to all apps, even those which only contain protected speech as to minors, is seriously overinclusive. This doesn’t even consider that adults who do not wish to provide the necessary means to have their age verified would also be restricted from gaining access to apps. But the law is also seriously underinclusive because minors could still access the same purportedly dangerous content available through apps by pre-loaded browsers like Safari or Chrome. Cf. Brown, 564 U.S. at 802.
A less speech-restrictive approach to protecting minors would be to promote voluntary content filters and application blockers and to educate parents and minors on how to use such tools while using their smartphones. SEAT, 814 F. Supp. 3d at 783; CCIA, 814 F. Supp. 3d at 801. This would promote the ability of parents and minors to avoid harm from particular apps at a much lower social cost than restricting minors’ access to all apps.
Age-verification and parental-consent requirements are not the least restrictive means to protecting minors from particular apps. The District Court’s finding that SB 2420 fails strict scrutiny should be affirmed.
SB 2420 also fails even under intermediate scrutiny. Under intermediate scrutiny, “a law will survive review ‘if it advances important governmental interests unrelated to the suppression of free speech and does not burden substantially more speech than necessary to further those interests.’” Free Speech Coal., 606 U.S. at 471 (quoting Turner Broadcasting System, Inc. v. FCC, 520 U.S. 180, 189 (1997)). Here, the law does not advance an important government interest unrelated to the suppression of free speech, and it also burdens substantially more speech than necessary.
First, as discussed above, the attempt to recast SB 2420 as contract regulation or a privacy bill must fail. The admitted justification of Texas is to “shield” minors from disfavored First Amendment-protected speech. See SEAT, 814 F. Supp. 3d at 781; CCIA, 814 F. Supp. 3d at 799. This makes it very different than obscenity or other speech unprotected as to minors. Cf. Free Speech Coal., 606 U.S. at 496 (“Texas’s interest in shielding children form sexual content is important, even ‘compelling.’”).
Second, the age-verification and parental-consent requirements burden substantially more speech than necessary. While Free Speech Coalition makes clear that the least restrictive means test does not apply under intermediate scrutiny, cf. id. at 497-99, the speech interests present for minors here are fundamentally different than those of minors in that case. In Free Speech Coalition, the question was whether age verification burdened adults’ speech more than necessary because minors have no First Amendment right to access pornography. See id. at 496 (“[Age verification] ensures than an age-based ban is not ineffectual, while at the same time allowing adults full access to the content in question after the modest burden of providing proof of age.”). Here, minors do have a right to access protected speech in apps that is burdened far more than necessary by age-gating.
The transaction costs of obtaining parental consent for every single app download or in-app purchase is not zero, which means there will be times where minors are restricted from speech that is not only lawful for them to access, but also that their parents or guardians would likely not oppose. This is, by definition, burdening substantially more speech than necessary.
The District Court’s finding that SB 2420 fails intermediate scrutiny should be affirmed.
Empowering parents to protect their children online is a worthy goal. But the means for doing so must still be consistent with the First Amendment. For the foregoing reasons, District Court should be affirmed.
[1] Available at https://laweconcenter.org/wp-content/uploads/2023/11/Issue-Brief-Transaction-Costs-of-Protecting-Children-Under-the-First-Amendment-.pdf.
TOTM Acity does not need to hang a “no cell towers allowed” sign to keep wireless service out. It can get there the quieter way: deny . . .
Acity does not need to hang a “no cell towers allowed” sign to keep wireless service out. It can get there the quieter way: deny one permit, then another, each for reasons that sound local, particular, and perfectly ordinary. The question at the heart of the Telecommunications Act of 1996 is whether federal law cares about the difference.
The Act was designed to speed wireless deployment while preserving local control over routine land-use decisions. Section 332(c)(7) reflects that compromise. It preserves state and local authority over the “placement, construction, and modification” of wireless facilities, while imposing a handful of federal constraints to ensure Americans receive the benefits of timely wireless-service deployment.
The most important of those constraints is the effective-prohibition clause, which provides that local regulation “shall not prohibit or have the effect of prohibiting the provision of personal wireless services.” The key words are “or have the effect of prohibiting.” That language extends beyond outright bans to government actions that, whatever their form, leave an area without wireless service. For nearly 30 years, courts have wrestled with a recurring question: How far does that functional phrase reach?
Faced with a statute that condemned effects without defining them, the federal courts of appeals developed a framework to fill the gap. Beginning with the 2nd U.S. Circuit Court of Appeals in Sprint Spectrum, L.P. v. Willoth (1999), and eventually adopted by nearly every circuit to consider the issue, courts converged on the “significant gap” test. Under that approach, a denial has the effect of prohibiting service when it leaves a significant gap in a carrier’s coverage and the carrier’s proposal is the least intrusive means of closing it. The test gave concrete meaning to the statute’s “effect of” language, tied liability to real-world coverage rather than the label a locality attached to its decision, and used the no-alternatives requirement to supply the causal connection implied by the word “effect.”
Last month, the 11th U.S. Circuit Court of Appeals broke from that consensus. In T-Mobile South, LLC v. City of Roswell, the court held that the effective-prohibition clause governs only the regulation of siting—that is, control through generally applicable rules—and therefore cannot be invoked to challenge the denial of a single permit application.
That reading is difficult to square with the statutory text. The phrase “effect of prohibiting” is at least as naturally read to reach functional prohibitions as formal ones. The court’s narrower interpretation also carries consequences that cut against the deployment Congress sought to accelerate. Under the 11th Circuit’s approach, a locality can keep wireless facilities out indefinitely by denying applications one at a time, each on seemingly site-specific grounds, without ever adopting a rule that a court could invalidate. The result is a moratorium in all but name—effectively insulated from challenge because no one put it in writing.
