Archives For Mergers & Acquisitions

[This is a guest post from Mario Zúñiga of EY Law in Lima, Perú. An earlier version was published in Spanish on the author’s personal blog. He gives thanks to Hugo Figari and Walter Alvarez for their comments on the initial version and special thanks to Lazar Radic for his advice and editing of the English version.]

There is a line of thinking according to which, without merger-control rules, antitrust law is “incomplete.”[1] Without such a regime, the argument goes, whenever a group of companies faces with the risk of being penalized for cartelizing, they could instead merge and thus “raise prices without any legal consequences.”[2]

A few months ago, at a symposium that INDECOPI[3] organized for the first anniversary the Peruvian Merger Control Act’s enactment,[4] Rubén Maximiano of the OECD’s Competition Division argued in support of the importance of merger-control regimes with the assessment that mergers are “like the ultimate cartel” because a merged firm could raise prices “with impunity.”

I get Maximiano’s point. Antitrust law was born, in part, to counter the rise of trusts, which had been used to evade the restriction that common law already imposed on “restraints of trade” in the United States. Let’s not forget, however, that these “trusts” were essentially a facade used to mask agreements to fix prices, and only to fix prices.[5] They were not real combinations of two or more businesses, as occurs in a merger. Therefore, even if one agree that it is important to scrutinize mergers, describing them as an alternative means of “cartelizing” is, to say the least, incomplete.

While this might seem to some to be a debate about mere semantics, I think is relevant to the broader context in which competition agencies are being pushed from various fronts toward a more aggressive application of merger-control rules.[6]

In describing mergers only as a strategy to gain more market power, or market share, or to expand profit margins, we would miss something very important: how these benefits would be obtained. Let’s not forget what the goal of antitrust law actually is. However we articulate this goal (“consumer welfare” or “the competitive process”), it is clear that antitrust law is more concerned with protecting a process than achieving any particular final result. It protects a dynamic in which, in principle, the market is trusted to be the best way to allocate resources.

In that vein, competition policy seeks to remove barriers to this dynamic, not to force a specific result. In this sense, it is not just what companies achieve in the market that matters, but how they achieve it. And there’s an enormous difference between price-fixing and buying a company. That’s why antitrust law gives a different treatment to “naked” agreements to collude while also contemplating an “ancillary agreements” doctrine.

By accepting this (“ultimate cartel”) approach to mergers, we would also be ignoring decades of economics and management literature. We would be ignoring, to start, the fundamental contributions of Ronald Coase in “The Nature of the Firm.” Acquiring other companies (or business lines or assets) allows us to reduce transaction costs and generate economies of scale in production. According to Coase:

The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of ‘organising’ production through the price mechanism is that of discovering what the relevant prices are. This cost may be reduced but it will not be eliminated by the emergence of specialists who will sell this information. The costs of negotiating and concluding a separate contract for each exchange transaction which takes place on a market must also be taken into account.

The simple answer to that could be to enter into long-term contracts, but Coase notes that that’s not that easy. He explains that:

There are, however, other disadvantages-or costs of using the price mechanism. It may be desired to make a long-term contract for the supply of some article or service. This may be due to the fact that if one contract is made for a longer period, instead of several shorter ones, then certain costs of making each contract will be avoided. Or, owing to the risk attitude of the people concerned, they may prefer to make a long rather than a short-term contract. Now, owing to the difficulty of forecasting, the longer the period of the contract is for the supply of the commodity or service, the less possible, and indeed, the less desirable it is for the person purchasing to specify what the other contracting party is expected to do.

Coase, to be sure, makes this argument mainly with respect to vertical mergers, but I think it may be applicable to horizontal mergers, as well, to the extent that the latter generate “economies of scale.” Moreover, it’s not unusual for many acquisitions that are classified as “horizontal” to also have a “vertical” component (e.g., a consumer-goods company may buy another company in the same line of business because it wants to take advantage of the latter’s distribution network; or a computer manufacturer may buy another computer company because it has an integrated unit that produces microprocessors).

We also should not leave aside the entrepreneurship element, which frequently is ignored in the antitrust literature and in antitrust law and policy. As Israel Kirzner pointed out more than 50 years ago:

An economics that emphasizes equilibrium tends, therefore, to overlook the role of the entrepreneur. His role becomes somehow identified with movements from one equilibrium position to another, with ‘innovations,’ and with dynamic changes, but not with the dynamics of the equilibrating process itself.

Instead of the entrepreneur, the dominant theory of price has dealt with the firm, placing the emphasis heavily on its profit-maximizing aspects. In fact, this emphasis has misled many students of price theory to understand the notion of the entrepreneur as nothing more than the focus of profit-maximizing decision-making within the firm. They have completely overlooked the role of the entrepreneur in exploiting superior awareness of price discrepancies within the economic system.”

Working in mergers and acquisitions, either as an external advisor or in-house counsel, has confirmed the aforementioned for me (anecdotal evidence, to be sure, but with the advantage of allowing very in-depth observations). Firms that take control of other firms are seeking to exploit the comparative advantages they may have over whoever is giving up control. Sometimes a company has (or thinks it has) knowledge or assets (greater knowledge of the market, better sales strategies, a broader distribution network, better access to credit, among many other potential advantages) that allow it to make better use of the seller’s existing assets.

An entrepreneur is successful because he or she sees what others do not see. Beatriz Boza summarizes it well in a section of her book “Empresarios” in which she details the purchase of the Santa Isabel supermarket chain by Intercorp (one of Peru’s biggest conglomerates). The group’s main shareholder, Carlos Rodríguez-Pastor, had already decided to enter the retail business and the opportunity came in 2003 when the Dutch group Ahold put Santa Isabel up for sale. The move was risky for Intercorp, in that Santa Isabel was in debt and operating at a loss. But Rodríguez-Pastor had been studying what was happening similar markets in other countries and knew that having a stake in the supermarket business would allow him to reach more consumer-credit customers, in addition to offering other vertical-integration opportunities. In retrospect, the deal can only be described as a success. In 2014, the company reached 34.1% market share and took in revenues of more than US$1.25 billion, with an EBITDA margin of 6.2%. Rodríguez-Pastor saw the synergies that others did not see, but he also dared to take the risk. As Boza writes:

 ‘Nobody ever saw the synergies,’ concludes the businessman, reminding the businessmen and executives who warned him that he was going to go bankrupt after the acquisition of Ahold’s assets. ‘Today we have a retail circuit that no one else can have.’

Competition authorities need to recognize these sorts of synergies and efficiencies,[7] and take them into account as compensating effects even where the combination might otherwise represent some risk to competition. That is why the vast majority of proposed mergers are approved by competition authorities around the world.

There is some evidence of companies that were sanctioned in cartel cases later choose to merge,[8] but what this requires is that the competition authorities put more effort into prosecuting those mergers, not that they adopt a much more aggressive approach to reviewing all mergers.

I am not proposing, of course, that we should abolish merger control or even that it should necessarily be “permissive.” Some mergers may indeed represent a genuine risk to competition. But in analyzing them, employing technical analytic techniques and robust evidence, it is important to recognize that entrepreneurs may have countless valid business reasons to carry out a merger—reasons that are often not fully formalized or even understood by the entrepreneurs themselves, since they operate under a high degree of uncertainty and risk.[9] An entrepreneur’s primary motivation is to maximize his or her own benefit, but we cannot just assume that this will be greater after “concentrating” markets.[10]

Competition agencies must recognize this, and not simply presume anticompetitive intentions or impacts. Antitrust law—and, in particular, the concentration-control regimes throughout the world—require that any harm to competition must be proved, and this is so precisely because mergers are not like cartels.

[1] The debate prior to the enactment of Peru’s Merger Control Act became too politicized and polarized. Opponents went so far as to affirm that merger control was “unconstitutional” (highly debatable) or that it constituted an interventionist policy (something that I believe cannot be assumed but is contingent on the type of regulation that is approved or how it is applied). On the other hand, advocates of the regulation claimed an inevitable scenario of concentrated markets and monopolies if the act was not approved (without any empirical evidence of this claim). My personal position was initially skeptical, considering that the priority—from a competition policy point of view, at least in a developing economy like Peru—should continue to be deregulation to remove entry barriers and to prosecute cartels. That being said, a well-designed and well-enforced merger-control regime (i.e., one that generally does not block mergers that are not harmful to competition; is agile; and has adequate protection from political interference) does not have to be detrimental to markets and can generate benefits in terms of avoiding anti-competitive mergers.

In Peru, the Commission for the Defense of Free Competition and its Technical Secretariat have been applying the law pretty reasonably. To date, of more than 20 applications, the vast majority have been approved without conditions, and one conditionally. In addition, approval requests have been resolved in an average of 23 days, below the legal term.

[2] See, e.g., this peer-reviewed 2018 OECD report: “The adoption of a merger control regime should be a priority for Peru, since in its absence competitors can circumvent the prohibition against anticompetitive agreements by merging – with effects potentially similar to those of a cartel immune from antitrust scrutiny.”

[3] National Institute for the Defense of Competition and the Protection of Intellectual Property (INDECOPI, after its Spanish acronym), is the Peruvian competition agency. It is an administrative agency with a broad scope of tasks, including antitrust law, unfair competition law, consumer protection, and intellectual property registration, among others. It can adjudicate cases and impose fines. Its decisions can be challenged before courts.

[4] You can watch the whole symposium (which I recommend) here.

[5] See Gregory J. Werden’s “The Foundations of Antitrust.” Werden explains how the term “trust” had lost its original legal meaning and designated all kinds of agreements intended to restrict competition.

[6] Brian Albrecht, “Are All Mergers Inherently Anticompetitive?

[7] See, e.g., the “Efficiencies” section of the U.S. Justice Department and Federal Trade Commission’s Horizontal Merger Guidelines, which are currently under review.

[8] See Stephen Davies, Peter Ormosiz, and Martin Graffenberger, “Mergers After Cartels: How Markets React to Cartel Breakdown.”

[9] It is always useful to revisit, in this regard, Judge Frank Easterbrook’s classic 1984 piece “The Limits of Antitrust.”

[10] Brian Albrecht explains here why we cannot assume that monopoly profits will always be greater than duopoly profits.

Economists have long recognized that innovation is key to economic growth and vibrant competition. As an Organisation for Economic Co-operation and Development (OECD) report on innovation and growth explains, “innovative activity is the main driver of economic progress and well-being as well as a potential factor in meeting global challenges in domains such as the environment and health. . . . [I]nnovation performance is a crucial determinant of competitiveness and national progress.”

It follows that an economically rational antitrust policy should be highly attentive to innovation concerns. In a December 2020 OECD paper, David Teece and Nicolas Petit caution that antitrust today is “missing broad spectrum competition that delivers innovation, which in turn is the main driver of long term growth in capitalist economies.” Thus, the authors stress that “[i]t is about time to put substance behind economists’ and lawyers’ long time admonition to inject more dynamism in our analysis of competition. An antitrust renaissance, not a revolution, is long overdue.”

Accordingly, before the U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) finalize their new draft merger guidelines, they would be well-advised to take heed of new research that “there is an important connection between merger activity and innovation.” This connection is described in a provocative new NERA Economic Consulting paper by Robert Kulick and Andrew Card titled “Mergers, Industries, and Innovation: Evidence from R&D Expenditures and Patent Applications.” As the executive summary explains (citation deleted):

For decades, there has been a broad consensus among policymakers, antitrust enforcers, and economists that most mergers pose little threat from an antitrust perspective and that mergers are generally procompetitive. However, over the past year, leadership at the FTC and DOJ has questioned whether mergers are, as a general matter, economically beneficial and asserted that mergers pose an active threat to innovation. The Agencies have also set the stage for a substantial increase in the scope of merger enforcement by focusing on new theories of anticompetitive harm such as elimination of potential competition from nascent competitors and the potential for cumulative anticompetitive harm from serial acquisitions. Despite the importance of the question of whether mergers have a positive or negative effect on industry-level innovation, there is very little empirical research on the subject. Thus, in this study, we investigate this question utilizing, what is to our knowledge, a never before used dataset combining industry-level merger data from the FTC/DOJ annual HSR reports with industry-level data from the NSF on R&D expenditure and patent applications. We find a strong positive and statistically significant relationship between merger activity and industry-level innovative activity. Over a three- to four-year cycle, a given merger is associated with an average increase in industry-level R&D expenditure of between $299 million and $436 million in R&D intensive industries. Extrapolating our results to the industry level implies that, on average, mergers are associated with an increase in R&D expenditure of between $9.27 billion and $13.52 billion per year in R&D intensive industries and an increase of between 1,430 and 3,035 utility patent applications per year. Furthermore, using a statistical technique developed by Nobel Laureate Clive Granger, we find that the direction of causality goes, to a substantial extent, directly from merger activity to increased R&D expenditure and patent applications. Based on these findings we draw the following key conclusions:

  • There is no evidence that mergers are generally associated with reduced innovation, nor do the results indicate that supposedly lax antitrust enforcement over the period from 2008 to 2020 diminished innovative activity. Indeed, R&D expenditure and patent applications increased substantially over the period studied, and this increase was directly linked to increases in merger activity.
  • In previous research, we found that “trends in industrial concentration do not provide a reliable basis for making inferences about the competitive effects of a proposed merger” as “trends in concentration may simply reflect temporary fluctuations which have no broader economic significance” or are “often a sign of increasing rather than decreasing market competition.” This study presents further evidence that previous consolidation in an industry or a “trend toward concentration” may reflect procompetitive responses to competitive pressures, and therefore should not play a role in merger review beyond that already embodied in the market-level concentration screens considered by the Agencies.
  • The Agencies should proceed cautiously in pursuing novel theories of anticompetitive harm; our findings are consistent with the prevailing consensus from the previous decades that there is an important connection between merger activity and innovation, and thus, a broad “anti-merger” policy, particularly one pursued in the absence of strong empirical evidence, has the potential to do serious harm by perversely inhibiting innovative activity.
  • Due to the link between mergers and innovative activity in R&D intensive industries where the potential for anticompetitive consequences can be resolved through remedies, relying on remedies rather than blocking transactions outright may encourage innovation while protecting consumers where there are legitimate competitive concerns about a particular transaction.
  • The potential for mergers to create procompetitive benefits should be taken seriously by policymakers, antitrust enforcers, courts, and academics and the Agencies should actively study the potential benefits, in addition to the costs, of mergers.

In short, the Kulick & Card paper lends valuable empirical support for an economics-based approach to merger analysis that fully takes into account innovation concerns. If the FTC and DOJ truly care about strengthening the American economy (consistent with “President Biden’s stated goals of renewing U.S. innovation and global competitiveness”—see, e.g., here and here), they should take heed in crafting new merger guidelines. An emphasis in the guidelines on avoiding interference with merger-related innovation (taking into account research by such scholars as Kulick, Card, Teece, and Petit) would demonstrate that the antitrust agencies are fully behind President Joe Biden’s plans to promote an innovative economy.

In the world of video games, the process by which players train themselves or their characters in order to overcome a difficult “boss battle” is called “leveling up.” I find that the phrase also serves as a useful metaphor in the context of corporate mergers. Here, “leveling up” can be thought of as acquiring another firm in order to enter or reinforce one’s presence in an adjacent market where a larger and more successful incumbent is already active.

In video-game terminology, that incumbent would be the “boss.” Acquiring firms choose to level up when they recognize that building internal capacity to compete with the “boss” is too slow, too expensive, or is simply infeasible. An acquisition thus becomes the only way “to beat the boss” (or, at least, to maximize the odds of doing so).

Alas, this behavior is often mischaracterized as a “killer acquisition” or “reverse killer acquisition.” What separates leveling up from killer acquisitions is that the former serve to turn the merged entity into a more powerful competitor, while the latter attempt to weaken competition. In the case of “reverse killer acquisitions,” the assumption is that the acquiring firm would have entered the adjacent market regardless absent the merger, leaving even more firms competing in that market.

In other words, the distinction ultimately boils down to a simple (though hard to answer) question: could both the acquiring and target firms have effectively competed with the “boss” without a merger?

Because they are ubiquitous in the tech sector, these mergers—sometimes also referred to as acquisitions of nascent competitors—have drawn tremendous attention from antitrust authorities and policymakers. All too often, policymakers fail to adequately consider the realistic counterfactual to a merger and mistake leveling up for a killer acquisition. The most recent high-profile example is Meta’s acquisition of the virtual-reality fitness app Within. But in what may be a hopeful sign of a turning of the tide, a federal court appears set to clear that deal over objections from the Federal Trade Commission (FTC).

Some Recent ‘Boss Battles’

The canonical example of leveling up in tech markets is likely Google’s acquisition of Android back in 2005. While Apple had not yet launched the iPhone, it was already clear by 2005 that mobile would become an important way to access the internet (including Google’s search services). Rumors were swirling that Apple, following its tremendously successful iPod, had started developing a phone, and Microsoft had been working on Windows Mobile for a long time.

In short, there was a serious risk that Google would be reliant on a single mobile gatekeeper (i.e., Apple) if it did not move quickly into mobile. Purchasing Android was seen as the best way to do so. (Indeed, averting an analogous sort of threat appears to be driving Meta’s move into virtual reality today.)

The natural next question is whether Google or Android could have succeeded in the mobile market absent the merger. My guess is that the answer is no. In 2005, Google did not produce any consumer hardware. Quickly and successfully making the leap would have been daunting. As for Android:

Google had significant advantages that helped it to make demands from carriers and OEMs that Android would not have been able to make. In other words, Google was uniquely situated to solve the collective action problem stemming from OEMs’ desire to modify Android according to their own idiosyncratic preferences. It used the appeal of its app bundle as leverage to get OEMs and carriers to commit to support Android devices for longer with OS updates. The popularity of its apps meant that OEMs and carriers would have great difficulty in going it alone without them, and so had to engage in some contractual arrangements with Google to sell Android phones that customers wanted. Google was better resourced than Android likely would have been and may have been able to hold out for better terms with a more recognizable and desirable brand name than a hypothetical Google-less Android. In short, though it is of course possible that Android could have succeeded despite the deal having been blocked, it is also plausible that Android became so successful only because of its combination with Google. (citations omitted)

In short, everything suggests that Google’s purchase of Android was a good example of leveling up. Note that much the same could be said about the company’s decision to purchase Fitbit in order to compete against Apple and its Apple Watch (which quickly dominated the market after its launch in 2015).

A more recent example of leveling up is Microsoft’s planned acquisition of Activision Blizzard. In this case, the merger appears to be about improving Microsoft’s competitive position in the platform market for game consoles, rather than in the adjacent market for games.

At the time of writing, Microsoft is staring down the barrel of a gun: Sony is on the cusp of becoming the runaway winner of yet another console generation. Microsoft’s executives appear to have concluded that this is partly due to a lack of exclusive titles on the Xbox platform. Hence, they are seeking to purchase Activision Blizzard, one of the most successful game studios, known among other things for its acclaimed Call of Duty series.

Again, the question is whether Microsoft could challenge Sony by improving its internal game-publishing branch (known as Xbox Game Studios) or whether it needs to acquire a whole new division. This is obviously a hard question to answer, but a cursory glance at the titles shipped by Microsoft’s publishing studio suggest that the issues it faces could not simply be resolved by throwing more money at its existing capacities. Indeed, Microsoft Game Studios seems to be plagued by organizational failings that might only be solved by creating more competition within the Microsoft company. As one gaming journalist summarized:

The current predicament of these titles goes beyond the amount of money invested or the buzzwords used to market them – it’s about Microsoft’s plan to effectively manage its studios. Encouraging independence isn’t an excuse for such a blatantly hands-off approach which allows titles to fester for years in development hell, with some fostering mistreatment to occur. On the surface, it’s just baffling how a company that’s been ranked as one of the top 10 most reputable companies eight times in 11 years (as per RepTrak) could have such problems with its gaming division.

The upshot is that Microsoft appears to have recognized that its own game-development branch is failing, and that acquiring a well-functioning rival is the only way to rapidly compete with Sony. There is thus a strong case to be made that competition authorities and courts should approach the merger with caution, as it has at least the potential to significantly increase competition in the game-console industry.

Finally, leveling up is sometimes a way for smaller firms to try and move faster than incumbents into a burgeoning and promising segment. The best example of this is arguably Meta’s effort to acquire Within, a developer of VR fitness apps. Rather than being an attempt to thwart competition from a competitor in the VR app market, the goal of the merger appears to be to compete with the likes of Google, Apple, and Sony at the platform level. As Mark Zuckerberg wrote back in 2015, when Meta’s VR/AR strategy was still in its infancy:

Our vision is that VR/AR will be the next major computing platform after mobile in about 10 years… The strategic goal is clearest. We are vulnerable on mobile to Google and Apple because they make major mobile platforms. We would like a stronger strategic position in the next wave of computing….

Over the next few years, we’re going to need to make major new investments in apps, platform services, development / graphics and AR. Some of these will be acquisitions and some can be built in house. If we try to build them all in house from scratch, then we risk that several will take too long or fail and put our overall strategy at serious risk. To derisk this, we should acquire some of these pieces from leading companies.

In short, many of the tech mergers that critics portray as killer acquisitions are just as likely to be attempts by firms to compete head-on with incumbents. This “leveling up” is precisely the sort of beneficial outcome that antitrust laws were designed to promote.

Building Products Is Hard

Critics are often quick to apply the “killer acquisition” label to any merger where a large platform is seeking to enter or reinforce its presence in an adjacent market. The preceding paragraphs demonstrate that it’s not that simple, as these mergers often enable firms to improve their competitive position in the adjacent market. For obvious reasons, antitrust authorities and policymakers should be careful not to thwart this competition.

The harder part is how to separate the wheat from the chaff. While I don’t have a definitive answer, an easy first step would be for authorities to more seriously consider the supply side of the equation.

Building a new product is incredibly hard, even for the most successful tech firms. Microsoft famously failed with its Zune music player and Windows Phone. The Google+ social network never gained any traction. Meta’s foray into the cryptocurrency industry was a sobering experience. Amazon’s Fire Phone bombed. Even Apple, which usually epitomizes Silicon Valley firms’ ability to enter new markets, has had its share of dramatic failures: Apple Maps, its Ping social network, and the first Home Pod, to name a few.

To put it differently, policymakers should not assume that internal growth is always a realistic alternative to a merger. Instead, they should carefully examine whether such a strategy is timely, cost-effective, and likely to succeed.

This is obviously a daunting task. Firms will struggle to dispositively show that they need to acquire the target firm in order to effectively compete against an incumbent. The question essentially hinges on the quality of the firm’s existing management, engineers, and capabilities. All of these are difficult—perhaps even impossible—to measure. At the very least, policymakers can improve the odds of reaching a correct decision by approaching these mergers with an open mind.

Under Chair Lina Khan’s tenure, the FTC has opted for the opposite approach and taken a decidedly hostile view of tech acquisitions. The commission sued to block both Meta’s purchase of Within and Microsoft’s acquisition of Activision Blizzard. Likewise, several economists—notably Tommasso Valletti—have called for policymakers to reverse the burden of proof in merger proceedings, and opined that all mergers should be viewed with suspicion because, absent efficiencies, they always reduce competition.

Unfortunately, this skeptical approach is something of a self-fulfilling prophecy: when authorities view mergers with suspicion, they are likely to be dismissive of the benefits discussed above. Mergers will be blocked and entry into adjacent markets will occur via internal growth. 

Large tech companies’ many failed attempts to enter adjacent markets via internal growth suggest that such an outcome would ultimately harm the digital economy. Too many “boss battles” will needlessly be lost, depriving consumers of precious competition and destroying startup companies’ exit strategies.

At the Jan. 26 Policy in Transition forum—the Mercatus Center at George Mason University’s second annual antitrust forum—various former and current antitrust practitioners, scholars, judges, and agency officials held forth on the near-term prospects for the neo-Brandeisian experiment undertaken in recent years by both the Federal Trade Commission (FTC) and the U.S. Justice Department (DOJ). In conjunction with the forum, Mercatus also released a policy brief on 2022’s significant antitrust developments.

Below, I summarize some of the forum’s noteworthy takeaways, followed by concluding comments on the current state of the antitrust enterprise, as reflected in forum panelists’ remarks.


    1. The consumer welfare standard is neither a recent nor an arbitrary antitrust-enforcement construct, and it should not be abandoned in order to promote a more “enlightened” interventionist antitrust.

George Mason University’s Donald Boudreaux emphasized in his introductory remarks that the standard goes back to Adam Smith, who noted in “The Wealth of Nations” nearly 250 years ago that the appropriate end of production is the consumer’s benefit. Moreover, American Antitrust Institute President Diana Moss, a leading proponent of more aggressive antitrust enforcement, argued in standalone remarks against abandoning the consumer welfare standard, as it is sufficiently flexible to justify a more interventionist agenda.

    1. The purported economic justifications for a far more aggressive antitrust-enforcement policy on mergers remain unconvincing.

Moss’ presentation expressed skepticism about vertical-merger efficiencies and called for more aggressive challenges to such consolidations. But Boudreaux skewered those arguments in a recent four-point rebuttal at Café Hayek. As he explains, Moss’ call for more vertical-merger enforcement ignores the fact that “no one has stronger incentives than do the owners and managers of firms to detect and achieve possible improvements in operating efficiencies – and to avoid inefficiencies.”

Moss’ complaint about chronic underenforcement mistakes by overly cautious agencies also ignores the fact that there will always be mistakes, and there is no reason to believe “that antitrust bureaucrats and courts are in a position to better predict the future [regarding which efficiencies claims will be realized] than are firm owners and managers.” Moreover, Moss provided “no substantive demonstration or evidence that vertical mergers often lead to monopolization of markets – that is, to industry structures and practices that harm consumers. And so even if vertical mergers never generate efficiencies, there is no good argument to use antitrust to police such mergers.”

And finally, Boudreaux considers Moss’ complaint that a court refused to condemn the AT&T-Time Warner merger, arguing that this does not demonstrate that antitrust enforcement is deficient:

[A]s soon as the  . . . merger proved to be inefficient, the parties themselves undid it. This merger was undone by competitive market forces and not by antitrust! (Emphasis in the original.)

    1. The agencies, however, remain adamant in arguing that merger law has been badly unenforced. As such, the new leadership plans to charge ahead and be willing to challenge more mergers based on mere market structure, paying little heed to efficiency arguments or actual showings of likely future competitive harm.

In her afternoon remarks at the forum, Principal Deputy Assistant U.S. Attorney General for Antitrust Doha Mekki highlighted five major planks of Biden administration merger enforcement going forward.

  • Clayton Act Section 7 is an incipiency statute. Thus, “[w]hen a [mere] change in market structure suggests that a firm will have an incentive to reduce competition, that should be enough [to justify a challenge].”
  • “Once we see that a merger may lead to, or increase, a firm’s market power, only in very rare circumstances should we think that a firm will not exercise that power.”
  • A structural presumption “also helps businesses conform their conduct to the law with more confidence about how the agencies will view a proposed merger or conduct.”
  • Efficiencies defenses will be given short shrift, and perhaps ignored altogether. This is because “[t]he Clayton Act does not ask whether a merger creates a more or less efficient firm—it asks about the effect of the merger on competition. The Supreme Court has never recognized efficiencies as a defense to an otherwise illegal merger.”
  • Merger settlements have often failed to preserve competition, and they will be highly disfavored. Therefore, expect a lot more court challenges to mergers than in recent decades. In short, “[w]e must be willing to litigate. . . . [W]e need to acknowledge the possibility that sometimes a court might not agree with us—and yet go to court anyway.”

Mekki’s comments suggest to me that the soon-to-be-released new draft merger guidelines may emphasize structural market-share tests, generally reject efficiencies justifications, and eschew the economic subtleties found in the current guidelines.

    1. The agencies—and the FTC, in particular—have serious institutional problems that undermine their effectiveness, and risk a loss of credibility before the courts in the near future.

In his address to the forum, former FTC Chairman Bill Kovacic lamented the inefficient limitations on reasoned FTC deliberations imposed by the Sunshine Act, which chills informal communications among commissioners. He also pointed to our peculiarly unique global status of having two enforcers with duplicative antitrust authority, and lamented the lack of policy coherence, which reflects imperfect coordination between the agencies.

Perhaps most importantly, Kovacic raised the specter of the FTC losing credibility in a possible world where Humphrey’s Executor is overturned (see here) and the commission is granted little judicial deference. He suggested taking lessons on policy planning and formulation from foreign enforcers—the United Kingdom’s Competition and Markets Authority, in particular. He also decried agency officials’ decisions to belittle prior administrations’ enforcement efforts, seeing it as detracting from the international credibility of U.S. enforcement.

    1. The FTC is embarking on a novel interventionist path at odds with decades of enforcement policy.

In luncheon remarks, Commissioner Christine S. Wilson lamented the lack of collegiality and consultation within the FTC. She warned that far-reaching rulemakings and other new interventionist initiatives may yield a backlash that undermines the institution.

Following her presentation, a panel of FTC experts discussed several aspects of the commission’s “new interventionism.” According to one panelist, the FTC’s new Section 5 Policy Statement on Unfair Methods of Competition (which ties “unfairness” to arbitrary and subjective terms) “will not survive in” (presumably, will be given no judicial deference by) the courts. Another panelist bemoaned rule-of-law problems arising from FTC actions, called for consistency in FTC and DOJ enforcement policies, and warned that the new merger guidelines will represent a “paradigm shift” that generates more business uncertainty.

The panel expressed doubts about the legal prospects for a proposed FTC rule on noncompete agreements, and noted that constitutional challenges to the agency’s authority may engender additional difficulties for the commission.

    1. The DOJ is greatly expanding its willingness to litigate, and is taking actions that may undermine its credibility in court.

Assistant U.S. Attorney General for Antitrust Jonathan Kanter has signaled a disinclination to settle, as well as an eagerness to litigate large numbers of cases (toward that end, he has hired a huge number of litigators). One panelist noted that, given this posture from the DOJ, there is a risk that judges may come to believe that the department’s litigation decisions are not well-grounded in the law and the facts. The business community may also have a reduced willingness to “buy in” to DOJ guidance.

Panelists also expressed doubts about the wisdom of DOJ bringing more “criminal Sherman Act Section 2” cases. The Sherman Act is a criminal statute, but the “beyond a reasonable doubt” standard of criminal law and Due Process concerns may arise. Panelists also warned that, if new merger guidelines are ”unsound,” they may detract from the DOJ’s credibility in federal court.

    1. International antitrust developments have introduced costly new ex ante competition-regulation and enforcement-coordination problems.

As one panelist explained, the European Union’s implementation of the new Digital Markets Act (DMA) will harmfully undermine market forces. The DMA is a form of ex ante regulation—primarily applicable to large U.S. digital platforms—that will harmfully interject bureaucrats into network planning and design. The DMA will lead to inefficiencies, market fragmentation, and harm to consumers, and will inevitably have spillover effects outside Europe.

Even worse, the DMA will not displace the application of EU antitrust law, but merely add to its burdens. Regrettably, the DMA’s ex ante approach is being imitated by many other enforcement regimes, and the U.S. government tacitly supports it. The DMA has not been included in the U.S.-EU joint competition dialogue, which risks failure. Canada and the U.K. should also be added to the dialogue.

Other International Concerns

The international panelists also noted that there is an unfortunate lack of convergence on antitrust procedures. Furthermore, different jurisdictions manifest substantial inconsistencies in their approaches to multinational merger analysis, where better coordination is needed. There is a special problem in the areas of merger review and of criminal leniency for price fixers: when multiple jurisdictions need to “sign off” on an enforcement matter, the “most restrictive” jurisdiction has an effective veto.

Finally, former Assistant U.S. Attorney General for Antitrust James Rill—perhaps the most influential promoter of the adoption of sound antitrust laws worldwide—closed the international panel with a call for enhanced transnational cooperation. He highlighted the importance of global convergence on sound antitrust procedures, emphasizing due process. He also advocated bolstering International Competition Network (ICN) and OECD Competition Committee convergence initiatives, and explained that greater transparency in agency-enforcement actions is warranted. In that regard, Rill said, ICN nongovernmental advisers should be given a greater role.


Taken as a whole, the forum’s various presentations painted a rather gloomy picture of the short-term prospects for sound, empirically based, economics-centric antitrust enforcement.

In the United States, the enforcement agencies are committed to far more aggressive antitrust enforcement, particularly with respect to mergers. The agencies’ new approach downplays efficiencies and they will be quick to presume broad categories of business conduct are anticompetitive, relying far less closely on case-specific economic analysis.

The outlook is also bad overseas, as European Union enforcers are poised to implement new ex ante regulation of competition by large platforms as an addition to—not a substitute for—established burdensome antitrust enforcement. Most foreign jurisdictions appear to be following the European lead, and the U.S. agencies are doing nothing to discourage them. Indeed, they appear to fully support the European approach.

The consumer welfare standard, which until recently was the stated touchstone of American antitrust enforcement—and was given at least lip service in Europe—has more or less been set aside. The one saving grace in the United States is that the federal courts may put a halt to the agencies’ overweening ambitions, but that will take years. In the meantime, consumer welfare will suffer and welfare-enhancing business conduct will be disincentivized. The EU courts also may place a minor brake on European antitrust expansionism, but that is less certain.

Recall, however, that when evils flew out of Pandora’s box, hope remained. Let us hope, then, that the proverbial worm will turn, and that new leadership—inspired by hopeful and enlightened policy advocates—will restore principled antitrust grounded in the promotion of consumer welfare.

The lame duck is not yet dead, and the Federal Trade Commission (FTC) is supposed to be an independent agency. Work continues. The Commission has announced a partly open oral argument in the Illumina-Grail matter.  That is, parts of the argument will be open to the public, via webcast, and parts won’t. This is what’s known as translucency in government.

Enquiring minds: I have several questions about Illumina-Grail. First, for anyone reading this column, am I the only one who cannot think of the case without thinking of Monty Python’s grail-shaped beacon? Asking for a friend who worries about me.

Second, why seek to unwind this merger? My ICLE colleagues Geoff Manne and Gus Hurwitz are members of a distinguished group of law & economics scholars who filed a motion for leave to file an amicus brief in the matter. They question the merits of the case on a number of grounds.

Pertinent, not dispositive: this is a vertical merger. Certainly, it’s possible for vertical mergers to harm competition but theory suggests that they entail at least some efficiencies, and the empirical evidence from Francine Lafontaine and others tends to suggest that most have been beneficial for firms and consumers alike. One might wonder about the extent to which this case is built on analysis of the facts and circumstances rather than on Chair Lina Khan’s well-publicized antipathy to vertical mergers.

Recall that the FTC and U.S. Justice Department (DOJ) jointly issued updated vertical-merger guidelines in June 2020. (The Global Antitrust Institute’s 2018 comments are worth review). The FTC—but not DOJ—promptly withdrew them in 2021, with a new majority, a partisan vote, and a questionable rationale for going it alone. Carl Shapiro and Herbert Hovenkamp minced no words, saying that the Commission’s justification rested on “specious economic arguments.”

There’s also a question of whether FTC’s likely foreclosure argument is all that likely. Illumina, which created Grail and had retained a substantial interest in it all along, would have strong commercial incentives against barring Grail’s future competitors from its platform. Moreover, Illumina made an open offer—contractually binding—to continue providing access for 12 years to its NGS platform and other products, on terms substantially similar to those available pre-merger. That would seem to undercut the possibility of foreclosure. Complaint counsel discounts this as a remedy (with behavioral remedies disfavored), but it is relatively straightforward and not really a remedy at all, with terms both private parties and the FTC might enforce. Thom Lambert and Jonathan Barnett both have interesting posts on the matter.

This is about a future market and potential (presumed) competitors. And it’s an area of biologics commerce where the deep pockets and regulatory sophistication necessary for development and approval frequently militate in favor of acquisition of a small innovator by a larger, established firm. As I noted in a prior column, “[p]otential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established.” It can be hard to second-guess rule-of-reason cases from the outside, but there are reasons to think this is one of those matters where the preconditions to a strong potential competition argument are absent, but merger-related efficiencies real.  

What else is going on at the FTC? Law360 reports on a staff brief urging the Commission not to pitch a new standard of review in Altria-Juul on what look to be sensible grounds, independent of the merits of their Section I case. The Commission had asked to be briefed on the possibility of switching to a claim of a per se violation or, in the alternative, quick look, and the staff brief recommends maintaining the rule-of-reason approach that the Commission’s ALJ found unpersuasive in dismissing the Commission’s case, which will now be heard by the Commission itself. I have no non-public information on the matter. There’s a question of whether this signals any real tension between the staff’s analysis and the Commission’s preferred approach or simply the Commission’s interest in asking questions about pushing boundaries and the staff providing good counsel. I don’t know, but it could be business as usual.

And just this week, FTC announced that it is bringing a case to block Microsoft’s acquisition of Activision. More on that to follow.

What’s pressing is not so clear. The Commission announced the agenda for a Dec. 14 open meeting. On it is a vote on regulatory review of the “green guides,” which provide guidance on environmental-marketing claims. But there’s nothing further on the various ANPRs announced in September, or about rulemaking that the Chair has hinted at for noncompete clauses in employment contracts. And, of course, we’re still waiting for merger guidelines to replace the ones that have been withdrawn—likely joint FTC/DOJ guidelines that will likely range over both horizontal and vertical mergers.

There’s the Altria matter, Meta, Meta-Within, the forthcoming Supreme Court opinion in Axon, etc. The FTC’s request for an injunction in Meta-Within will be heard in federal district court in California over the next couple of weeks. It’s a novel (read, speculative) complaint. I had a few paragraphs on Meta-Within in my first roundup column; Gus Hurwitz covered it, as well. We shall see. 

Wandering up Pennsylvania Avenue onto the Hill, various bills seem not so much lame ducks as dead ones. But perhaps one or more is not dead yet. The Journalism Competition and Preservation Act (JCPA) might be one such bill, its conspicuous defects notwithstanding. “Might be.” First, a bit of FTC history. Way back in 2010, the FTC held a series of workshops on the Future of Journalism. There were many interesting issues there, if no obvious room for antitrust. I reveal no secrets in saying THOSE WORKSHOPS WERE NOT THE STAFF’S IDEA. We failed to recommend any intervention, although the staff did publish a clarification of its discussion draft:

The FTC has not endorsed the idea of making any policy recommendation or recommended any of the proposals in the discussion draft

My own take at the time: many newspapers were struggling, and that was unfortunate, but much of the struggle had to do with the papers’ loss of local print-advertising monopolies, which tended to offer high advertising prices but not high quality. Remember the price of classified ads? For decades, many of the holders of market power happened to turn large portions of their rents over to their news divisions. Then came the internet, then Craigslist, etc., etc., and down went the rents. Antitrust intervention seemed no answer at all.

Back to the bill. In brief, as currently drafted, the JCPA would permit certain “digital journalism providers” to form cartels to negotiate prices with large online platforms, and to engage in group boycotts, without being liable to the federal antitrust laws, at least for four years. Dirk Auer and Ben Sperry have an overview here.

This would be an exemption for some sources of journalism, but not all, and its benefits would not be equally distributed. I am a paying consumer of digital (and even print) journalism. On the one hand, I enjoy it when others subsidize my preferences. On the other, I’m not sure why they should. As I said in a prior column, “antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.”  

Moreover, as Brian Albrecht points out, the bill’s mandatory final arbitration provision is likely to lead to a form of price regulation.

England v. France on Saturday. Allez les bleus or we few, we happy few? Cheers.  

Faithful and even occasional readers of this roundup might have noticed a certain temporal discontinuity between the last post and this one. The inimitable Gus Hurwitz has passed the scrivener’s pen to me, a recent refugee from the Federal Trade Commission (FTC), and the roundup is back in business. Any errors going forward are mine. Going back, blame Gus.

Commissioner Noah Phillips departed the FTC last Friday, leaving the Commission down a much-needed advocate for consumer welfare and the antitrust laws as they are, if not as some wish they were. I recommend the reflections posted by Commissioner Christine S. Wilson and my fellow former FTC Attorney Advisor Alex Okuliar. Phillips collaborated with his fellow commissioners on matters grounded in the law and evidence, but he wasn’t shy about crying frolic and detour when appropriate.

The FTC without Noah is a lesser place. Still, while it’s not always obvious, many able people remain at the Commission and some good solid work continues. For example, FTC staff filed comments urging New York State to reject a Certificate of Public Advantage (“COPA”) application submitted by SUNY Upstate Health System and Crouse Medical. The staff’s thorough comments reflect investigation of the proposed merger, recent research, and the FTC’s long experience with COPAs. In brief, the staff identified anticompetitive rent-seeking for what it is. Antitrust exemptions for health-care providers tend to make health care worse, but more expensive. Which is a corollary to the evergreen truth that antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.

More Good News from the Commission

On Sept. 30, a unanimous Commission announced that an independent physician association in New Mexico had settled allegations that it violated a 2005 consent order. The allegations? Roughly 400 physicians—independent competitors—had engaged in price fixing, violating both the 2005 order and the Sherman Act. As the concurring statement of Commissioners Phillips and Wilson put it, the new order “will prevent a group of doctors from allegedly getting together to negotiate… higher incomes for themselves and higher costs for their patients.” Oddly, some have chastised the FTC for bringing the action as anti-labor. But the IPA is a regional “must-have” for health plans and a dominant provider to consumers, including patients, who might face tighter budget constraints than the median physician

Peering over the rims of the rose-colored glasses, my gaze turns to Meta. In July, the FTC sued to block Meta’s proposed acquisition of Within Unlimited (and its virtual-reality exercise app, Supernatural). Gus wrote about it with wonder, noting reports that the staff had recommended against filing, only to be overruled by the chair.

Now comes October and an amended complaint. The amended complaint is even weaker than the opening salvo. Now, the FTC alleges that the acquisition would eliminate potential competition from Meta in a narrower market, VR-dedicated fitness apps, by “eliminating any probability that Meta would enter the market through alternative means absent the Proposed Acquisition, as well as eliminating the likely and actual beneficial influence on existing competition that results from Meta’s current position, poised on the edge of the market.”

So what if Meta were to abandon the deal—as the FTC wants—but not enter on its own? Same effect, but the FTC cannot seriously suggest that Meta has a positive duty to enter the market. Is there a jurisdiction (or a planet) where a decision to delay or abandon entry would be unlawful unilateral conduct? Suppose instead that Meta enters, with virtual-exercise guns blazing, much to the consternation of firms actually in the market, which might complain about it. Then what? Would the Commission cheer or would it allege harm to nascent competition, or perhaps a novel vertical theory? And by the way, how poised is Meta, given no competing product in late-stage development? Would the FTC prefer that Meta buy a different competitor? Should the overworked staff commence Meta’s due diligence?

Potential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established. But this is a nascent market in a large, highly dynamic, and innovative industry. The competitive landscape a few years down the road is anyone’s guess. More speculation: the staff was right all along. For more, see Dirk Auer’s or Geoffrey Manne’s threads on the amended complaint.

When It Rains It Pours Regulations

On Aug. 22, the FTC published an advance notice of proposed rulemaking (ANPR) to consider the potential regulation of “commercial surveillance and data security” under its Section 18 authority. Shortly thereafter, they announced an Oct. 20 open meeting with three more ANPRs on the agenda.

First, on the advance notice: I’m not sure what they mean by “commercial surveillance.” The term doesn’t appear in statutory law, or in prior FTC enforcement actions. It sounds sinister and, surely, it’s an intentional nod to Shoshana Zuboff’s anti-tech polemic “The Age of Surveillance Capitalism.” One thing is plain enough: the proffered definition is as dramatically sweeping as it is hopelessly vague. The Commission seems to be contemplating a general data regulation of some sort, but we don’t know what sort. They don’t say or even sketch a possible rule. That’s a problem for the FTC, because the law demands that the Commission state its regulatory objectives, along with regulatory alternatives under consideration, in the ANPR itself. If they get to an NPRM, they are required to describe a proposed rule with specificity.

What’s clear is that the ANPR takes a dim view of much of the digital economy. And while the Commission has considerable experience in certain sorts of privacy and data security matters, the ANPR hints at a project extending well past that experience. Commissioners Phillips and Wilson dissented for good and overlapping reasons. Here’s a bit from the Phillips dissent:

When adopting regulations, clarity is a virtue. But the only thing clear in the ANPR is a rather dystopic view of modern commerce….I cannot support an ANPR that is the first step in a plan to go beyond the Commission’s remit and outside its experience to issue rules that fundamentally alter the internet economy without a clear congressional mandate….It’s a naked power grab.

Be sure to read the bonus material in the Federal Register—supporting statements from Chair Lina Khan and Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya, and dissenting statements from Commissioners Phillips and Wilson. Chair Khan breezily states that “the questions we ask in the ANPR and the rules we are empowered to issue may be consequential, but they do not implicate the ‘major questions doctrine.’” She’s probably half right: the questions do not violate the Constitution. But she’s probably half wrong too.

For more, see ICLE’s Oct. 20 panel discussion and the executive summary to our forthcoming comments to the Commission.

But wait, there’s more! There were three additional ANPRs on the Commission’s Oct. 20 agenda. So that’s four and counting. Will there be a proposed rule on non-competes? Gig workers? Stay tuned. For now, note that rules are not self-enforcing, and that the chair has testified to Congress that the Commission is strapped for resources and struggling to keep up with its statutory mission. Are more regulations an odd way to ask Congress for money? Thus far, there’s no proposed rule on gig workers, but there was a Policy Statement on Enforcement Related to Gig Workers.. For more on that story, see Alden Abbott’s TOTM post.

Laws, Like People, Have Their Limits

Read Phillips’s parting dissent in Passport Auto Group, where the Commission combined legitimate allegations with an unhealthy dose of overreach:

The language of the unfairness standard has given the FTC the flexibility to combat new threats to consumers that accompany the development of new industries and technologies. Still, there are limits to the Commission’s unfairness authority. Because this complaint includes an unfairness count that aims to transform Section 5 into an undefined discrimination statute, I respectfully dissent.”

Right. Three cheers for effective enforcement of the focused antidiscrimination laws enacted by Congress by the agencies actually charged to enforce those laws. And to equal protection. And three more, at least, for a little regulatory humility, if we find it.

The concept of European “digital sovereignty” has been promoted in recent years both by high officials of the European Union and by EU national governments. Indeed, France made strengthening sovereignty one of the goals of its recent presidency in the EU Council.

The approach taken thus far both by the EU and by national authorities has been not to exclude foreign businesses, but instead to focus on research and development funding for European projects. Unfortunately, there are worrying signs that this more measured approach is beginning to be replaced by ill-conceived moves toward economic protectionism, ostensibly justified by national-security and personal-privacy concerns.

In this context, it is worth reconsidering why Europeans’ best interests are best served not by economic isolationism, but by an understanding of sovereignty that capitalizes on alliances with other free democracies.

Protectionism Under the Guise of Cybersecurity

Among the primary worrying signs regarding the EU’s approach to digital sovereignty is the union’s planned official cybersecurity-certification scheme. The European Commission is reportedly pushing for “digital sovereignty” conditions in the scheme, which would include data and corporate-entity localization and ownership requirements. This can be categorized as “hard” data localization in the taxonomy laid out by Peter Swire and DeBrae Kennedy-Mayo of Georgia Institute of Technology, in that it would prohibit both data transfers to other countries and for foreign capital to be involved in processing even data that is not transferred.

The European Cybersecurity Certification Scheme for Cloud Services (EUCS) is being prepared by ENISA, the EU cybersecurity agency. The scheme is supposed to be voluntary at first, but it is expected that it will become mandatory in the future, at least for some situations (e.g., public procurement). It was not initially billed as an industrial-policy measure and was instead meant to focus on technical security issues. Moreover, ENISA reportedly did not see the need to include such “digital sovereignty” requirements in the certification scheme, perhaps because they saw them as insufficiently grounded in genuine cybersecurity needs.

Despite ENISA’s position, the European Commission asked the agency to include the digital–sovereignty requirements. This move has been supported by a coalition of European businesses that hope to benefit from the protectionist nature of the scheme. Somewhat ironically, their official statement called on the European Commission to “not give in to the pressure of the ones who tend to promote their own economic interests,”

The governments of Denmark, Estonia, Greece, Ireland, Netherlands, Poland, and Sweden expressed “strong concerns” about the Commission’s move. In contrast, Germany called for a political discussion of the certification scheme that would take into account “the economic policy perspective.” In other words, German officials want the EU to consider using the cybersecurity-certification scheme to achieve protectionist goals.

Cybersecurity certification is not the only avenue by which Brussels appears to be pursuing protectionist policies under the guise of cybersecurity concerns. As highlighted in a recent report from the Information Technology & Innovation Foundation, the European Commission and other EU bodies have also been downgrading or excluding U.S.-owned firms from technical standard-setting processes.

Do Security and Privacy Require Protectionism?

As others have discussed at length (in addition to Swire and Kennedy-Mayo, also Theodore Christakis) the evidence for cybersecurity and national-security arguments for hard data localization have been, at best, inconclusive. Press reports suggest that ENISA reached a similar conclusion. There may be security reasons to insist upon certain ways of distributing data storage (e.g., across different data centers), but those reasons are not directly related to the division of national borders.

In fact, as illustrated by the well-known architectural goal behind the design of the U.S. military computer network that was the precursor to the Internet, security is enhanced by redundant distribution of data and network connections in a geographically dispersed way. The perils of putting “all one’s data eggs” in one basket (one locale, one data center) were amply illustrated when a fire in a data center of a French cloud provider, OVH, famously brought down millions of websites that were only hosted there. (Notably, OVH is among the most vocal European proponents of hard data localization).

Moreover, security concerns are clearly not nearly as serious when data is processed by our allies as it when processed by entities associated with less friendly powers. Whatever concerns there may be about U.S. intelligence collection, it would be detached from reality to suggest that the United States poses a national-security risk to EU countries. This has become even clearer since the beginning of the Russian invasion of Ukraine. Indeed, the strength of the U.S.-EU security relationship has been repeatedly acknowledged by EU and national officials.

Another commonly used justification for data localization is that it is required to protect Europeans’ privacy. The radical version of this position, seemingly increasingly popular among EU data-protection authorities, amounts to a call to block data flows between the EU and the United States. (Most bizarrely, Russia seems to receive a more favorable treatment from some European bureaucrats). The legal argument behind this view is that the United States doesn’t have sufficient legal safeguards when its officials process the data of foreigners.

The soundness of that view is debated, but what is perhaps more interesting is that similar privacy concerns have also been identified by EU courts with respect to several EU countries. The reaction of those European countries was either to ignore the courts, or to be “ruthless in exploiting loopholes” in court rulings. It is thus difficult to treat seriously the claims that Europeans’ data is much better safeguarded in their home countries than if it flows in the networks of the EU’s democratic allies, like the United States.

Digital Sovereignty as Industrial Policy

Given the above, the privacy and security arguments are unlikely to be the real decisive factors behind the EU’s push for a more protectionist approach to digital sovereignty, as in the case of cybersecurity certification. In her 2020 State of the Union speech, EU Commission President Ursula von der Leyen stated that Europe “must now lead the way on digital—or it will have to follow the way of others, who are setting these standards for us.”

She continued: “On personalized data—business to consumer—Europe has been too slow and is now dependent on others. This cannot happen with industrial data.” This framing suggests an industrial-policy aim behind the digital-sovereignty agenda. But even in considering Europe’s best interests through the lens of industrial policy, there are reasons to question the manner in which “leading the way on digital” is being implemented.

Limitations on foreign investment in European tech businesses come with significant costs to the European tech ecosystem. Those costs are particularly high in the case of blocking or disincentivizing American investment.

Effect on startups

Early-stage investors such as venture capitalists bring more than just financial capital. They offer expertise and other vital tools to help the businesses in which they invest. It is thus not surprising that, among the best investors, those with significant experience in a given area are well-represented. Due to the successes of the U.S. tech industry, American investors are especially well-positioned to play this role.

In contrast, European investors may lack the needed knowledge and skills. For example, in its report on building “deep tech” companies in Europe, Boston Consulting Group noted that a “substantial majority of executives at deep-tech companies and more than three-quarters of the investors we surveyed believe that European investors do not have a good understanding of what deep tech is.”

More to the point, even where EU players do hold advantages, a cooperative economic and technological system will allow the comparative advantage of both U.S. and EU markets to redound to each others’ benefit. That is to say, of course not all U.S. investment expertise will apply in the EU, but certainly some will. Similarly, there will be EU firms that are positioned to share their expertise in the United States. But there is no ex ante way to know when and where these complementarities will exist, which essentially dooms efforts at centrally planning technological cooperation.

Given the close economic, cultural, and historical ties of the two regions, it makes sense to work together, particularly given the rising international-relations tensions outside of the western sphere. It also makes sense, insofar as the relatively open private-capital-investment environment in the United States is nearly impossible to match, let alone surpass, through government spending.

For example, national government and EU funding in Europe has thus far ranged from expensive failures (the “Google-killer”) to the all-too-predictable bureaucracy-heavy grantmaking, the beneficiaries of which describe as lacking flexibility, “slow,” “heavily process-oriented,” and expensive for businesses to navigate. As reported by the Financial Times’ Sifted website, the EU’s own startup-investment scheme (the European Innovation Council) backed only one business over more than a year, and it had “delays in payment” that “left many startups short of cash—and some on the brink of going out of business.”

Starting new business ventures is risky, especially for the founders. They risk devoting their time, resources, and reputation to an enterprise that may very well fail. Given this risk of failure, the potential upside needs to be sufficiently high to incentivize founders and early employees to take the gamble. This upside is normally provided by the possibility of selling one’s shares in a business. In BCG’s previously cited report on deep tech in Europe, respondents noted that the European ecosystem lacks “clear exit opportunities”:

Some investors fear being constrained by European sovereignty concerns through vetoes at the state or Europe level or by rules potentially requiring European ownership for deep-tech companies pursuing strategically important technologies. M&A in Europe does not serve as the active off-ramp it provides in the US. From a macroeconomic standpoint, in the current environment, investment and exit valuations may be impaired by inflation or geopolitical tensions.

More broadly, those exit opportunities also factor importantly into funders’ appetite to price the risk of failure in their ventures. Where the upside is sufficiently large, an investor might be willing to experiment in riskier ventures and be suitably motivated to structure investments to deal with such risks. But where the exit opportunities are diminished, it makes much more sense to spend time on safer bets that may provide lower returns, but are less likely to fail. Coupled with the fact that government funding must run through bureaucratic channels, which are inherently risk averse, the overall effect is a less dynamic funding system.

The Central and Eastern Europe (CEE) region is an especially good example of the positive influence of American investment in Europe’s tech ecosystem. According to the state-owned Polish Development Fund and, in 2019, $0.9 billion of venture-capital investment in CEE came from the United States, $0.5 billion from Europe, and $0.1 billion from the rest of the world.

Direct investment

Technological investment is rarely, if ever, a zero-sum game. U.S. firms that invest in the EU (and vice versa) do not do so as foreign conquerors, but as partners whose own fortunes are intertwined with their host country. Consider, for example, Google’s recent PLN 2.7 billion investment in Poland. Far from extractive, that investment will build infrastructure in Poland, and will employ an additional 2,500 Poles in the company’s cloud-computing division. This sort of partnership plants the seeds that grow into a native tech ecosystem. The Poles that today work in Google’s cloud-computing division are the founders of tomorrow’s innovative startups rooted in Poland.

The funding that accompanies native operations of foreign firms also has a direct impact on local economies and tech ecosystems. More local investment in technology creates demand for education and support roles around that investment. This creates a virtuous circle that ultimately facilitates growth in the local ecosystem. And while this direct investment is important for large countries, in smaller countries, it can be a critical component in stimulating their own participation in the innovation economy. 

According to Crunchbase, out of 2,617 EU-headquartered startups founded since 2010 with total equity funding amount of at least $10 million, 927 (35%) had at least one founder who previously worked for an American company. For example, two of the three founders of Madrid-based Seedtag (total funding of more than $300 million) worked at Google immediately before starting Seedtag.

It is more difficult to quantify how many early employees of European startups built their experience in American-owned companies, but it is likely to be significant and to become even more so, especially in regions—like Central and Eastern Europe—with significant direct U.S. investment in local talent.


Explicit industrial policy for protectionist ends is—at least, for the time being—regarded as unwise public policy. But this is not to say that countries do not have valid national interests that can be met through more productive channels. While strong data-localization requirements is ultimately counterproductive, particularly among closely allied nations, countries have a legitimate interest in promoting the growth of the technology sector within their borders.

National investment in R&D can yield fruit, particularly when that investment works in tandem with the private sector (see, e.g., the Bayh-Dole Act in the United States). The bottom line, however, is that any intervention should take care to actually promote the ends it seeks. Strong data-localization policies in the EU will not lead to success of the local tech industry, but it will serve to wall the region off from the kind of investment that can make it thrive.

A White House administration typically announces major new antitrust initiatives in the fall and spring, and this year is no exception. Senior Biden administration officials kicked off the fall season at Fordham Law School (more on that below) by shedding additional light on their plans to expand the accepted scope of antitrust enforcement.

Their aggressive enforcement statements draw headlines, but will the administration’s neo-Brandeisians actually notch enforcement successes? The prospects are cloudy, to say the least.

The U.S. Justice Department (DOJ) has lost some cartel cases in court this year (what was the last time that happened?) and, on Sept. 19, a federal judge rejected the DOJ’s attempt to enjoin United Health’s $13.8 billion bid for Change Healthcare. The Federal Trade Commission (FTC) recently lost two merger challenges before its in-house administrative law judge. It now faces a challenge to its administrative-enforcement processes before the U.S. Supreme Court (the Axon case, to be argued in November).

(Incidentally, on the other side of the Atlantic, the European Commission has faced some obstacles itself. Despite its recent Google victory, the Commission has effectively lost two abuse of dominance cases this year—the Intel and Qualcomm matters—before the European General Court.)

So, are the U.S. antitrust agencies chastened? Will they now go back to basics? Far from it. They enthusiastically are announcing plans to charge ahead, asserting theories of antitrust violations that have not been taken seriously for decades, if ever. Whether this turns out to be wise enforcement policy remains to be seen, but color me highly skeptical. Let’s take a quick look at some of the big enforcement-policy ideas that are being floated.

Fordham Law’s Antitrust Conference

Admiral David Farragut’s order “Damn the torpedoes, full speed ahead!” was key to the Union Navy’s August 1864 victory in the Battle of Mobile Bay, a decisive Civil War clash. Perhaps inspired by this display of risk-taking, the heads of the two federal antitrust agencies—DOJ Assistant Attorney General (AAG) Jonathan Kanter and FTC Chair Lina Khan—took a “damn the economics, full speed ahead” attitude in remarks at the Sept. 16 session of Fordham Law School’s 49th Annual Conference on International Antitrust Law and Policy. Special Assistant to the President Tim Wu was also on hand and emphasized the “all of government” approach to competition policy adopted by the Biden administration.

In his remarks, AAG Kanter seemed to be endorsing a “monopoly broth” argument in decrying the current “Whac-a-Mole” approach to monopolization cases. The intent may be to lessen the burden of proof of anticompetitive effects, or to bring together a string of actions taken jointly as evidence of a Section 2 violation. In taking such an approach, however, there is a serious risk that efficiency-seeking actions may be mistaken for exclusionary tactics and incorrectly included in the broth. (Notably, the U.S. Court of Appeals for the D.C. Circuit’s 2001 Microsoft opinion avoided the monopoly-broth problem by separately discussing specific company actions and weighing them on their individual merits, not as part of a general course of conduct.)

Kanter also recommended going beyond “our horizontal and vertical framework” in merger assessments, despite the fact that vertical mergers (involving complements) are far less likely to be anticompetitive than horizontal mergers (involving substitutes).

Finally, and perhaps most problematically, Kanter endorsed the American Innovative and Choice Online Act (AICOA), citing the protection it would afford “would-be competitors” (but what about consumers?). In so doing, the AAG ignored the fact that AICOA would prohibit welfare-enhancing business conduct and could be harmfully construed to ban mere harm to rivals (see, for example, Stanford professor Doug Melamed’s trenchant critique).

Chair Khan’s presentation, which called for a far-reaching “course correction” in U.S. antitrust, was even more bold and alarming. She announced plans for a new FTC Act Section 5 “unfair methods of competition” (UMC) policy statement centered on bringing “standalone” cases not reachable under the antitrust laws. Such cases would not consider any potential efficiencies and would not be subject to the rule of reason. Endorsing that approach amounts to an admission that economic analysis will not play a serious role in future FTC UMC assessments (a posture that likely will cause FTC filings to be viewed skeptically by federal judges).

In noting the imminent release of new joint DOJ-FTC merger guidelines, Khan implied that they would be animated by an anti-merger philosophy. She cited “[l]awmakers’ skepticism of mergers” and congressional rejection “of economic debits and credits” in merger law. Khan thus asserted that prior agency merger guidance had departed from the law. I doubt, however, that many courts will be swayed by this “economics free” anti-merger revisionism.

Tim Wu’s remarks closing the Fordham conference had a “big picture” orientation. In an interview with GW Law’s Bill Kovacic, Wu briefly described the Biden administration’s “whole of government” approach, embodied in President Joe Biden’s July 2021 Executive Order on Promoting Competition in the American Economy. While the order’s notion of breaking down existing barriers to competition across the American economy is eminently sound, many of those barriers are caused by government restrictions (not business practices) that are not even alluded to in the order.

Moreover, in many respects, the order seeks to reregulate industries, misdiagnosing many phenomena as business abuses that actually represent efficient free-market practices (as explained by Howard Beales and Mark Jamison in a Sept. 12 Mercatus Center webinar that I moderated). In reality, the order may prove to be on net harmful, rather than beneficial, to competition.


What is one to make of the enforcement officials’ bold interventionist screeds? What seems to be missing in their presentations is a dose of humility and pragmatism, as well as appreciation for consumer welfare (scarcely mentioned in the agency heads’ presentations). It is beyond strange to see agencies that are having problems winning cases under conventional legal theories floating novel far-reaching initiatives that lack a sound economics foundation.

It is also amazing to observe the downplaying of consumer welfare by agency heads, given that, since 1979 (in Reiter v. Sonotone), the U.S. Supreme Court has described antitrust as a “consumer welfare prescription.” Unless there is fundamental change in the makeup of the federal judiciary (and, in particular, the Supreme Court) in the very near future, the new unconventional theories are likely to fail—and fail badly—when tested in court. 

Bringing new sorts of cases to test enforcement boundaries is, of course, an entirely defensible role for U.S. antitrust leadership. But can the same thing be said for bringing “non-boundary” cases based on theories that would have been deemed far beyond the pale by both Republican and Democratic officials just a few years ago? Buckle up: it looks as if we are going to find out. 

The Federal Trade Commission (FTC) wants to review in advance all future acquisitions by Facebook parent Meta Platforms. According to a Sept. 2 Bloomberg report, in connection with its challenge to Meta’s acquisition of fitness-app maker Within Unlimited,  the commission “has asked its in-house court to force both Meta and [Meta CEO Mark] Zuckerberg to seek approval from the FTC before engaging in any future deals.”

This latest FTC decision is inherently hyper-regulatory, anti-free market, and contrary to the rule of law. It also is profoundly anti-consumer.

Like other large digital-platform companies, Meta has conferred enormous benefits on consumers (net of payments to platforms) that are not reflected in gross domestic product statistics. In a December 2019 Harvard Business Review article, Erik Brynjolfsson and Avinash Collis reported research finding that Facebook:

…generates a median consumer surplus of about $500 per person annually in the United States, and at least that much for users in Europe. … [I]ncluding the consumer surplus value of just one digital good—Facebook—in GDP would have added an average of 0.11 percentage points a year to U.S. GDP growth from 2004 through 2017.

The acquisition of complementary digital assets—like the popular fitness app produced by Within—enables Meta to continually enhance the quality of its offerings to consumers and thereby expand consumer surplus. It reflects the benefits of economic specialization, as specialized assets are made available to enhance the quality of Meta’s offerings. Requiring Meta to develop complementary assets in-house, when that is less efficient than a targeted acquisition, denies these benefits.

Furthermore, in a recent editorial lambasting the FTC’s challenge to a Meta-Within merger as lacking a principled basis, the Wall Street Journal pointed out that the challenge also removes incentive for venture-capital investments in promising startups, a result at odds with free markets and innovation:

Venture capitalists often fund startups on the hope that they will be bought by larger companies. [FTC Chair Lina] Khan is setting down the marker that the FTC can block acquisitions merely to prevent big companies from getting bigger, even if they don’t reduce competition or harm consumers. This will chill investment and innovation, and it deserves a burial in court.

This is bad enough. But the commission’s proposal to require blanket preapprovals of all future Meta mergers (including tiny acquisitions well under regulatory pre-merger reporting thresholds) greatly compounds the harm from its latest ill-advised merger challenge. Indeed, it poses a blatant challenge to free-market principles and the rule of law, in at least three ways.

  1. It substitutes heavy-handed ex ante regulatory approval for a reliance on competition, with antitrust stepping in only in those limited instances where the hard facts indicate a transaction will be anticompetitive. Indeed, in one key sense, it is worse than traditional economic regulation. Empowering FTC staff to carry out case-by-case reviews of all proposed acquisitions inevitably will generate arbitrary decision-making, perhaps based on a variety of factors unrelated to traditional consumer-welfare-based antitrust. FTC leadership has abandoned sole reliance on consumer welfare as the touchstone of antitrust analysis, paving the wave for potentially abusive and arbitrary enforcement decisions. By contrast, statutorily based economic regulation, whatever its flaws, at least imposes specific standards that staff must apply when rendering regulatory determinations.
  2. By abandoning sole reliance on consumer-welfare analysis, FTC reviews of proposed Meta acquisitions may be expected to undermine the major welfare benefits that Meta has previously bestowed upon consumers. Given the untrammeled nature of these reviews, Meta may be expected to be more cautious in proposing transactions that could enhance consumer offerings. What’s more, the general anti-merger bias by current FTC leadership would undoubtedly prompt them to reject some, if not many, procompetitive transactions that would confer new benefits on consumers.
  3. Instituting a system of case-by-case assessment and approval of transactions is antithetical to the normal American reliance on free markets, featuring limited government intervention in market transactions based on specific statutory guidance. The proposed review system for Meta lacks statutory warrant and (as noted above) could promote arbitrary decision-making. As such, it seriously flouts the rule of law and threatens substantial economic harm (sadly consistent with other ill-considered initiatives by FTC Chair Khan, see here and here).

In sum, internet-based industries, and the big digital platforms, have thrived under a system of American technological freedom characterized as “permissionless innovation.” Under this system, the American people—consumers and producers—have been the winners.

The FTC’s efforts to micromanage future business decision-making by Meta, prompted by the challenge to a routine merger, would seriously harm welfare. To the extent that the FTC views such novel interventionism as a bureaucratic template applicable to other disfavored large companies, the American public would be the big-time loser.

[The following is a guest post from Philip Hanspach of the European University Institute.]

There is an emerging debate regarding whether complexity theory—which, among other things, draws lessons about uncertainty and non-linearity from the natural sciences—should make inroads into antitrust (see, e.g., Nicolas Petit and Thibault Schrepel, 2022). Of course, one might also say that antitrust is already quite late to the party. Since the 1990s, complexity theory has made inroads into numerous “hard” and social sciences, from geography and urban planning to cultural studies.

Depending on whom you ask, complexity theory is everything from a revolutionary paradigm to a lazy buzzword. What would it mean to apply it in the context of antitrust and would it, in fact, be useful?

Given its numerous applications, scholars have proposed several definitions of complexity theory, invoking different kinds of complexity. According to one, complexity theory is concerned with the study of complex adaptive systems (CAS)—that is, networks that consist of many diverse, interdependent parts. A CAS may adapt and change, for example, in response to past experience.

That does not sound too strange as a general description either of the economy as a whole or of markets in particular, with consumers, firms, and potential entrants among the numerous moving parts. At the same time, this approach contrasts with orthodox economic theory—specifically, with the game-theory models that rule antitrust debates and that prize simplicity and reductionism.

As both a competition economist and a history buff, my primary point of reference for complexity theory is a scholarly debate among Bronze Age scholars. Sound obscure? Bear with me.

The collapse of several flourishing Mediterranean civilizations in the 12th century B.C. (Mycenae and Egypt, to name only two) puzzles historians as much as today’s economists are stumped by the question of whether any particular merger will raise prices.[1] Both questions encounter difficulties in gathering sufficient data for empirical analysis (the lack of counterfactuals and foresight in one case, and 3,000 years of decay in the other), forcing a recourse to theory and possibility results.

Earlier Bronze Age scholarship blamed the “Sea Peoples,” invaders of unknown origin (possibly Sicily or Sardinia), for the destruction of several thriving cities and states. The primary source for this thesis was statements attributed to the Egyptian pharaoh of the time. More recent research, while acknowledging the role of the Sea Peoples, but has gone to lengths to point out that, in many cases, we simply don’t know. Alternative explanations (famine, disease, systems collapse) are individually unconvincing as alternative explanations, but might each have contributed to the end of various Bronze Age civilizations.

Complexity theory was brought into this discussion with some caution. While acknowledging the theory’s potential usefulness, Eric Cline writes:

We may just be applying a scientific (or possibly pseudoscientific) term to a situation in which there is insufficient knowledge to draw firm conclusions. It sounds nice, but does it really advance our understanding? Is it more than just a fancy way to state a fairly obvious fact?

In a review of Cline’s book, archaeologist Guy D. Middleton agreed that the application of complexity theory might be “useful” but also “obvious.” Similarly, in the context of antitrust, I think complexity theory may serve as a useful framework to understand uncertainty in the marketplace.

Thinking of a market as a CAS can help to illustrate the uncertainty behind every decision. For example, a formal economic model with a clear (at least, to economists) equilibrium outcome might predict that a certain merger will give firms the incentive and ability to reduce spending on research and development. But the lens of complexity theory allows us to better understand why we might still be wrong, or why we are right, but for the wrong reasons.

We can accept that decisions that are relevant and observable to antitrust practitioners (such as price and production decisions) can be driven by things that are small and unobservable. For example, a manager who ultimately calls the shots on R&D budgets for an airplane manufacturer might go to a trade fair and become fascinated by a cool robot that a particular shipyard presented. This might have been the key push that prompted her to finance an unlikely robotics project proposed by her head engineer.

Her firm is, indeed, part of a complex system—one that includes the individual purchase decisions of consumers, customer feedback, reports from salespeople in the field, news from science and business journalists about the next big thing, and impressions at trade fairs and exhibitions. These all coalesce in the manager’s head and influence simple decisions about her R&D budget. But I have yet to see a merger-review decision that predicted effects on innovation from peeking into managers’ minds in such a way.

This little story might be a far-fetched example of the Butterfly Effect, perhaps the most familiar concept from complexity theory. Just as the flaps of a butterfly’s wings might cause a storm on the other side of the world, the shipyard’s earlier decision to invest in a robotic manufacturing technology resulted in our fictitious aircraft manufacturer’s decision to invest more in R&D than we might have predicted with our traditional tools.

Indeed, it is easy to think of other small events that can have consequences leading to price changes that are relevant in the antitrust arena. Remember the cargo ship Ever Given, which blocked the Suez Canal in March 2021? One reason mentioned for its distress were unusually strong winds (whether a butterfly was to blame, I don’t know) pushing the highly stacked containers like a sail. The disruption to supply chains was felt in various markets across Europe.

In my opinion, one benefit of admitting this complexity is that it can make ex post evaluation more common in antitrust. Indeed, some researchers are doing great work on this. Enforcers are understandably hesitant to admit that they might get it wrong sometimes, but I believe that we can acknowledge that we will not ultimately know whether merged firms will, say, invest more or less in innovation. Complexity theory tells us that, even if our best and most appropriate model is wrong, the world is not random. It is just very hard to understand and hinges on things that are neither straightforward to observe, nor easy to correctly gauge ex ante.

Turning back to the Bronze Age, scholars have an easier time observing that a certain city was destroyed and abandoned at some point in time than they do in correctly naming the culprit (the Sea Peoples, a rival power, an earthquake?) The appeal of complexity theory is not just that it lifts a scholar’s burden to name one or a few predominant explanations, but that it grants confidence that the decision itself arose out of a complex system: the big and small effects that factors such as famine, trade, weather, and fortune may have had on the city’s ability to defend itself against attack, and the individual-but-interrelated decisions of a city’s citizens to stay or leave following a catastrophe.

Similarly, for antitrust experts, it is easier to observe a price increase following a merger than to correctly guess its reason. Where economists differ from archaeologists and classicists is that they don’t just study the past. They have to continue exploring the present and future. Imagine that an agency clears a merger that we would have expected not to harm competition, but it turns out, ex post, that it was a bad call. Complexity theory doesn’t just offer excuses for where reality diverged from our prediction. Instead, it can tell us whether our tools were deficient or whether we made an “honest mistake.” As investigations are always costly, it is up to the enforcer (or those setting their budget) to decide whether it makes sense to expand investigations to account for new, complex phenomena (reading the minds of R&D managers will probably remain out of the budget for the foreseeable future).

Finally, economists working on antitrust problems should not see this as belittling their role, but as a welcome frame for their work. Computing diversion ratios or modeling a complex market as a straightforward set of equations might still be the best we can do. A model that is right on average gets us closer to the right answer and is certainly preferred to having no clue what’s going on. Where we don’t have precedent to guide us, we have to resort to models that may be wrong, despite getting everything right that was under our control.

A few things that Petit and Schrepel call for are comfortably established in the economist’s toolkit. They might not, however, always be put to use where they should. Notably, there are feedback loops in dynamic models. Even in static models, it is possible to show how a change in one variable has direct and indirect (second order) effects on an outcome. The typical merger investigation is concerned with short-term effects, perhaps those materializing over the three to five years following a merger. These short-term effects may be relatively easy to approximate in a simple model. Granted, Petit and Schrepel’s article adopts a wide understanding of antitrust—including pro-competitive market regulation—but this seems like an important caveat, nonetheless.

In conclusion, complexity theory is something economists and lawyers who study markets should learn more about. It’s a fascinating research paradigm and a framework in which one can make sense of small and large causes having sometimes unpredictable effects. For antitrust practitioners, it can advance our understanding of why our predictions can fail when the tools and approaches that we use are limited. My hope is that understanding complexity will increase openness to ex-post valuation and the expectations toward antitrust enforcement (and its limits). At the same time, it is still an (economic) question of costs and benefits as to whether further complications in an antitrust investigation are worth it.

[1] A fascinating introduction that balances approachability and source work is YouTube’s Extra History series on the Bronze Age collapse.

A recent viral video captures a prevailing sentiment in certain corners of social media, and among some competition scholars, about how mergers supposedly work in the real world: firms start competing on price, one firm loses out, that firm agrees to sell itself to the other firm and, finally, prices are jacked up.(Warning: Keep the video muted. The voice-over is painful.)

The story ends there. In this narrative, the combination offers no possible cost savings. The owner of the firm who sold doesn’t start a new firm and begin competing tomorrow, and nor does anyone else. The story ends with customers getting screwed.

And in this telling, it’s not just horizontal mergers that look like the one in the viral egg video. It is becoming a common theory of harm regarding nonhorizontal acquisitions that they are, in fact, horizontal acquisitions in disguise. The acquired party may possibly, potentially, with some probability, in the future, become a horizontal competitor. And of course, the story goes, all horizontal mergers are anticompetitive.

Therefore, we should have the same skepticism toward all mergers, regardless of whether they are horizontal or vertical. Steve Salop has argued that a problem with the Federal Trade Commission’s (FTC) 2020 vertical merger guidelines is that they failed to adopt anticompetitive presumptions.

This perspective is not just a meme on Twitter. The FTC and U.S. Justice Department (DOJ) are currently revising their guidelines for merger enforcement and have issued a request for information (RFI). The working presumption in the RFI (and we can guess this will show up in the final guidelines) is exactly the takeaway from the video: Mergers are bad. Full stop.

The RFI repeatedly requests information that would support the conclusion that the agencies should strengthen merger enforcement, rather than information that might point toward either stronger or weaker enforcement. For example, the RFI asks:

What changes in standards or approaches would appropriately strengthen enforcement against mergers that eliminate a potential competitor?

This framing presupposes that enforcement should be strengthened against mergers that eliminate a potential competitor.

Do Monopoly Profits Always Exceed Joint Duopoly Profits?

Should we assume enforcement, including vertical enforcement, needs to be strengthened? In a world with lots of uncertainty about which products and companies will succeed, why would an incumbent buy out every potential competitor? The basic idea is that, since profits are highest when there is only a single monopolist, that seller will always have an incentive to buy out any competitors.

The punchline for this anti-merger presumption is “monopoly profits exceed duopoly profits.” The argument is laid out most completely by Salop, although the argument is not unique to him. As Salop points out:

I do not think that any of the analysis in the article is new. I expect that all the points have been made elsewhere by others and myself.

Under the model that Salop puts forward, there should, in fact, be a presumption against any acquisition, not just horizontal acquisitions. He argues that:

Acquisitions of potential or nascent competitors by a dominant firm raise inherent anticompetitive concerns. By eliminating the procompetitive impact of the entry, an acquisition can allow the dominant firm to continue to exercise monopoly power and earn monopoly profits. The dominant firm also can neutralize the potential innovation competition that the entrant would provide.

We see a presumption against mergers in the recent FTC challenge of Meta’s purchase of Within. While Meta owns Oculus, a virtual-reality headset and Within owns virtual-reality fitness apps, the FTC challenged the acquisition on grounds that:

The Acquisition would cause anticompetitive effects by eliminating potential competition from Meta in the relevant market for VR dedicated fitness apps.

Given the prevalence of this perspective, it is important to examine the basic model’s assumptions. In particular, is it always true that—since monopoly profits exceed duopoly profits—incumbents have an incentive to eliminate potential competition for anticompetitive reasons?

I will argue no. The notion that monopoly profits exceed joint-duopoly profits rests on two key assumptions that hinder the simple application of the “merge to monopoly” model to antitrust.

First, even in a simple model, it is not always true that monopolists have both the ability and incentive to eliminate any potential entrant, simply because monopoly profits exceed duopoly profits.

For the simplest complication, suppose there are two possible entrants, rather than the common assumption of just one entrant at a time. The monopolist must now pay each of the entrants enough to prevent entry. But how much? If the incumbent has already paid one potential entrant not to enter, the second could then enter the market as a duopolist, rather than as one of three oligopolists. Therefore, the incumbent must pay the second entrant an amount sufficient to compensate a duopolist, not their share of a three-firm oligopoly profit. The same is true for buying the first entrant. To remain a monopolist, the incumbent would have to pay each possible competitor duopoly profits.

Because monopoly profits exceed duopoly profits, it is profitable to pay a single entrant half of the duopoly profit to prevent entry. It is not, however, necessarily profitable for the incumbent to pay both potential entrants half of the duopoly profit to avoid entry by either. 

Now go back to the video. Suppose two passersby, who also happen to have chickens at home, notice that they can sell their eggs. The best part? They don’t have to sit around all day; the lady on the right will buy them. The next day, perhaps, two new egg sellers arrive.

For a simple example, consider a Cournot oligopoly model with an industry-inverse demand curve of P(Q)=1-Q and constant marginal costs that are normalized to zero. In a market with N symmetric sellers, each seller earns 1/((N+1)^2) in profits. A monopolist makes a profit of 1/4. A duopolist can expect to earn a profit of 1/9. If there are three potential entrants, plus the incumbent, the monopolist must pay each the duopoly profit of 3*1/9=1/3, which exceeds the monopoly profits of 1/4.

In the Nash/Cournot equilibrium, the incumbent will not acquire any of the competitors, since it is too costly to keep them all out. With enough potential entrants, the monopolist in any market will not want to buy any of them out. In that case, the outcome involves no acquisitions.

If we observe an acquisition in a market with many potential entrants, which any given market may or may not have, it cannot be that the merger is solely about obtaining monopoly profits, since the model above shows that the incumbent doesn’t have incentives to do that.

If our model captures the dynamics of the market (which it may or may not, depending on a given case’s circumstances) but we observe mergers, there must be another reason for that deal besides maintaining a monopoly. The presence of multiple potential entrants overturns the antitrust implications of the truism that monopoly profits exceed duopoly profits. The question turns instead to empirical analysis of the merger and market in question, as to whether it would be profitable to acquire all potential entrants.

The second simplifying assumption that restricts the applicability of Salop’s baseline model is that the incumbent has the lowest cost of production. He rules out the possibility of lower-cost entrants in Footnote 2:

Monopoly profits are not always higher. The entrant may have much lower costs or a better or highly differentiated product. But higher monopoly profits are more usually the case.

If one allows the possibility that an entrant may have lower costs (even if those lower costs won’t be achieved until the future, when the entrant gets to scale), it does not follow that monopoly profits (under the current higher-cost monopolist) necessarily exceed duopoly profits (with a lower-cost producer involved).

One cannot simply assume that all firms have the same costs or that the incumbent is always the lowest-cost producer. This is not just a modeling choice but has implications for how we think about mergers. As Geoffrey Manne, Sam Bowman, and Dirk Auer have argued:

Although it is convenient in theoretical modeling to assume that similarly situated firms have equivalent capacities to realize profits, in reality firms vary greatly in their capabilities, and their investment and other business decisions are dependent on the firm’s managers’ expectations about their idiosyncratic abilities to recognize profit opportunities and take advantage of them—in short, they rest on the firm managers’ ability to be entrepreneurial.

Given the assumptions that all firms have identical costs and there is only one potential entrant, Salop’s framework would find that all possible mergers are anticompetitive and that there are no possible efficiency gains from any merger. That’s the thrust of the video. We assume that the whole story is two identical-seeming women selling eggs. Since the acquired firm cannot, by assumption, have lower costs of production, it cannot improve on the incumbent’s costs of production.

Many Reasons for Mergers

But whether a merger is efficiency-reducing and bad for competition and consumers needs to be proven, not just assumed.

If we take the basic acquisition model literally, every industry would have just one firm. Every incumbent would acquire every possible competitor, no matter how small. After all, monopoly profits are higher than duopoly profits, and so the incumbent both wants to and can preserve its monopoly profits. The model does not give us a way to disentangle when mergers would stop without antitrust enforcement.

Mergers do not affect the production side of the economy, under this assumption, but exist solely to gain the market power to manipulate prices. Since the model finds no downsides for the incumbent to acquiring a competitor, it would naturally acquire every last potential competitor, no matter how small, unless prevented by law. 

Once we allow for the possibility that firms differ in productivity, however, it is no longer true that monopoly profits are greater than industry duopoly profits. We can see this most clearly in situations where there is “competition for the market” and the market is winner-take-all. If the entrant to such a market has lower costs, the profit under entry (when one firm wins the whole market) can be greater than the original monopoly profits. In such cases, monopoly maintenance alone cannot explain an entrant’s decision to sell.

An acquisition could therefore be both procompetitive and increase consumer welfare. For example, the acquisition could allow the lower-cost entrant to get to scale quicker. The acquisition of Instagram by Facebook, for example, brought the photo-editing technology that Instagram had developed to a much larger market of Facebook users and provided a powerful monetization mechanism that was otherwise unavailable to Instagram.

In short, the notion that incumbents can systematically and profitably maintain their market position by acquiring potential competitors rests on assumptions that, in practice, will regularly and consistently fail to materialize. It is thus improper to assume that most of these acquisitions reflect efforts by an incumbent to anticompetitively maintain its market position.

Early August is an unpredictable time in the policy world. With Congress about to go on recess, one never knows if there will be a mad rush to get something done, or what that something may be. And it is, for many, a month of vacations and light schedules. Short staffing may delay work or allow mistakes to be made. And then there’s Alex Jones’s lawyer – for whom the best that can be said is that he will forever be known as “Alex Jones’s lawyer” than by his given name. The Roundup this week is brought to you by the letter unpredictability.

This week’s headline is antitrust labor issues. The week started off with news that a senior Republican staffer is leaving the Senate Judiciary Committee – a staffer who has reportedly been instrumental in drafting the American Innovation and Choice Online Act (AICOA) – to join Amazon as a lobbyist. As Politico suggests, this “move is particularly notable because the legislation he was working on – [AICOA] – is losing steam.” More on that in a moment. 

The next bit of antitrust labor news is word of an FTC Inspector General report stemming from an audit of the FTC’s use of unpaid consultants and experts. As reported by Leah Nylen, the OIG report found that this practice, used in prior administrations by expanded substantially under current FTC Chair Lina Khan, “creat[es] potential legal and compliance risks, including conflicts of interest.” The report expressly notes that the “audit was not designed to determine whether unpaid consultant or experts were involved in activities prohibited by the federal policies … and [makes] no assertions on their involvement in those activities.” It then goes on to lay out various activities they were involved in that clearly violate federal policies. Oh my.

The big antitrust labor news of the week is, of course, that of Tim Wu’s quantum departure from his role as White House central competition czar. The story of his pending return to the ivory tower broke on Tuesday and spread fast to all corners. The next morning, the man himself reported that those reports were “greatly exaggerated.” He has not, however, said whether this means he’s sticking around in his current role for days, weeks, or months – though it bears note that the original report was merely that he would be returning to his teaching position “in the coming months.” One wonders whether his suggestion that he is not leaving is itself a great exaggeration.

Uncertainty over the fate of Wu evokes uncertainty over the state of AICOA – indeed, their fates could be intimately linked. Last week, around the time Wu might have made the decision to leave, it would have seemed AICOA was losing steam. With the Inflation Reduction Act taking all the Big Bill energy during the mad-dash to the August recess, even Senator Klobuchar (D-MN) was forced to admit that AICOA would not get a vote before the recess. Then came the report that Klobuchar has offered to amend the bill to address the concerns that Senator Brian Schatz (D-HI) and other democratic senators have that AICOA could limit platforms’ content moderation practices. (Side note: Ashley Gold is simply killing this beat this week.) This is a remarkable change in stance for Klobuchar, who has steadfastly refused to consider such an amendment – almost certainly because she knows it will cost needed Republican support for the bill. One wonders how many Republicans will be one board after such an amendment is made.

Turning the page, the next day Politico reported that Senate Majority Leader Schumer (D-NY) plans, but also may not plan, to bring AICOA to the floor after the recess. His plans are either more or less clear than Tim Wu’s plans to leave his position. It seems likely that Schumer is supporting Klobuchar’s efforts to get votes for the bill, but his support for bringing it to the floor may yet be contingent. The Politico report suggests that Schumer’s office may have backed off from saying he plans to bring it to the floor – and may even pressured prior reports to remove a statement that he would bring it to the floor.

So what’s going on with AICOA? I stand by my prior assessment that it’s dead. Actually, I think that it’s now worse than dead – it’s now a mere political football. Senator Manchin’s flip on Build Back Better has soured the likelihood of any bipartisan bills moving forward. The fact that Klobuchar is buckling to Schatz’s demand to address the bill’s threat to content moderation – the only thing that really excited Republicans about the bill – suggests that the current maneuver is to put forth a partisan Big Tech bill that will not pass but that may win some voters’ hearts in November. 

This week’s FTC UMC Roundup ends with an FTC UMC question: Where’s the UMC in the Meta-Within challenge? Last week’s complaint alleges vanilla violations of Section 7 of the Clayton Act. While it mentions the FTC’s Section 5 authority, it does so in boilerplate language. The substantive bases alleged to satisfy the agency’s Section 13(b) burden to get an preliminary injunction against the merger all sound in the traditional language of mergers and Section 7 – that the effect of the merger “may be substantially to lessen competition, or tend to create a monopoly.”

This is interesting for a few reasons. Most notably, as many have noted (Ashley Gold again), the case is a real dog under traditional antitrust law. It’s hard to imagine the FTC not losing – likely at the PI stage and even moreso at trial. If the case is so weak under traditional antitrust law, why not argue this case under non-traditional antitrust law? FTC’s UMC authority is recognized to be broader than traditional antitrust law, precisely to enable the Commission to take action against anticompetitive conduct that falls outside the scope of traditional antitrust law.

Indeed, one of Chair Khan’s stated goals has been to explore the boundaries of the Commission’s UMC authority and to use it to reinvigorate antitrust enforcement. The expectation has been that this would come through the agency’s rulemaking authority – but the agency can develop new law through litigation just as much as through rulemaking. There is even a case, post-West Virginia v. EPA, that the case-by-case approach to expanding its UMC authority is a more viable path forward than to risk raising major questions through a rulemaking.

One wonders what the FTC’s calculation here is. It could simply be a case of boilerplate drafting. Perhaps there was some greater fight within the agency over how to draft the complaint. We know there was dissent from the staff over whether to bring the complaint at all – perhaps this left little time or energy to draft anything more than a standard complaint. Or, perhaps more cynically, the winning move is to lose on traditional antitrust grounds – and to use that as an example to demonstrate the FTC’s need to use its UMC authority in cases such as these.

The FTC UMC Roundup, part of the Truth on the Market FTC UMC Symposium, is a weekly roundup of news relating to the Federal Trade Commission’s antitrust and Unfair Methods of Competition authority. If you would like to receive this and other posts relating to these topics, subscribe to the RSS feed here. If you have news items you would like to suggest for inclusion, please mail them to us at and/or