THere Are Mergers to worry about and mergers to welcome. The first category includes mergers between large firms in the same industry. These “horizontal” mergers remove a competitor from the market, removing price constraints. In such cases, the competition authorities investigate the merger and can block it. Other mergers have been seen as less problematic in the past. When one company buys another in an adjacent line of business (conglomerate merger) or when a supplier buys a customer (vertical merger), the competitive effects were seen as favorable.
But that has changed in recent years. More and more non-horizontal mergers are being challenged by antitrust authorities. In September, the American Federal Trade Commission (ftc) lost his challenge in court through a connection between Illumina, the “Next Generation” DNAsequencing tools and Grail, a developer of cancer screening tests based on Illumina technology. The ftc appeals against the verdict. In October, the UK Competition and Markets Authority (cma) forced Facebook to buy Giphy, a provider of gifs on social media platforms. On February 8th, the cma published an initial finding that the acquisition of game studio Activision Blizzard by Microsoft, the maker of the Xbox game console, would reduce competition in the industry.
Strong antitrust policies are often motivated by fears of big tech. Facebook, Google and Microsoft quickly became dominant in their markets due to the power of the networks: the more people used their products, the better they became and the more attractive they became for other customers. While it’s hard to fault such organic growth for competitive reasons, there’s a belief in Trustbuster circles that Big Tech shouldn’t be allowed to buy other companies along the way. Recent regulatory activism is therefore fueled by regrets about the past. However, it comes with its own risks. In many cases, mergers are actually a boon for consumers. The danger now is that the pendulum is swinging in the direction of over-enforcement.
To understand how regulators got to this point, it’s worth going back to the 1970s. A group of antitrust thought leaders around the University of Chicago challenged the idea that vertical mergers could be harmful, using the “single monopoly win” theory. This theory states that a monopolist cannot extend its market power up or down the vertical production chain. To understand it, imagine an airport operator who leases space to two cafes. The operator owns a monopoly resource: the land surrounding a captive market of passengers in need of their morning caffeine. In order to maximize profits, rents are set high enough to allow the stores no more than a competitive rate of return. However, if the operator bought one of the coffee merchants, the profit-maximizing rent would not change (hence a monopoly profit).
Seen in this way, vertical mergers cannot harm consumers. They might even help you. A related theory posits that in an industry where there is some market power at each stage of production, vertical merger will result in lower prices because one of the uncompetitive markups is eliminated. In such circumstances, a monopoly profit means you won’t be exploited twice.
Trustbusters are less focused on pricing these days. They are more concerned that a vertically integrated company will use its strength in one part of the chain to freeze competitors in another. In the Illumina case, there is concern that Grail’s competitors will be denied this DNA-Sequencing tools they need to develop competitive cancer tests. In the case of Microsoft, there are fears that Sony, the maker of PlayStation, Xbox’s competitor console, will be denied games by Activision to the detriment of the competition. To uphold the charge, Trustbusters must demonstrate that such restrictions would be profitable, which they are unlikely to be in the short term, as they mean they sell fewer products, at least initially. Regulators therefore have to make predictions about how a market might develop. This is the economic equivalent of long-term weather forecasting.
That brings the story back to Big Tech. The winner-takes-all aspect of networks tends to eliminate competitors from the big tech giants. Competition policy cannot do much against such dominance. In theory, myriad startups are vying to oust big tech firms that should be in control of how they do business. But so-called “shootout” acquisitions — purchases of startups that could become rivals to big tech companies — tend to neutralize any threat from this corner. For many trustbusters, Facebook’s acquisition of the fledgling Instagram in 2012 fell into this category. It also regrets that Google’s acquisition of DoubleClick, an ad server, in 2008 helped strengthen its hold on digital advertising, a market now the subject of a major antitrust investigation.
praise of big business
Undoubtedly there were times when more vigilance was called for. But it’s easy to forget that the Chicago Revolution was a reaction to overpowering trustbusters who believed that big is always bad and that small businesses, terrible as they are, should be protected from competition. In America, the courts are a check on overenforcement. There is decades of case law, coined by the Chicago School, that says non-horizontal mergers are benign. Still, the prospect of a court battle is enough to deter some firms. Last year, Nvidia, a chipmaker, abandoned its proposed merger poora chip designer, in the face of antitrust scrutiny.
It is significant that the cma has taken the lead in blocking mergers involving tech giants like Facebook and Microsoft. Britain’s trustbusters could now be among the most feared. Freed from the EU‘s competition policy, the cma revised its policies in 2020 to give more weight to the potential development of post-merger markets. In the UK and Europe, competition cases are pursued in an administrative system, not in court as in America. All that gives cma considerable powers. A rare example of a Brexit dividend? Trustbusters might say so. Not everyone would agree. ■
Read more from Free Exchange, our column on business:
The AI boom: lessons from history (February 2nd)
Have economists misunderstood inflation? (January 26)
Could Europe end up with a worse inflation problem than America? (January 19)
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