Last month the Federal Trade Commission (FTC) and the Department of Justice (DOJ) announced their intent to revise merger guidelines. Questions from the FTC and DOJ’s request for information (RFI) imply that market power could be of increasing importance when determining whether the agencies will approve or deny future mergers.
While the DOJ and FTC are pursuing a firmer line with big businesses, both agencies ignore the reality that mergers and acquisitions allow firms to innovate and use economies of scale to better serve their customers. Rewriting merger guidelines to make it harder for mergers and acquisitions could ultimately be bad for consumers, businesses, and innovation.
While the ten pages of questions that the agencies jointly released in January only signal the agencies’ intent for revision, the questions do provide insight into the areas they might be focused on. For example, the RFI asks whether thresholds should be adjusted for the presumption of anti-competitiveness, suggesting that firm size could play an increasingly important role.
In his statement responding to the agency’s joint RFI to update existing guidelines, Assistant Attorney General of the Department of Justice Antitrust Division, Jonathan Kanter said “our country depends on competition to drive progress, innovation, and prosperity.” However, in later remarks, Kanter focused on consolidation as a primary concern, not competition.
The Sherman Act (1890) and the Clayton Act (1914) are at the basis of America’s antitrust law. These bills outline what qualifies as illegal behavior and focus on how corporate behavior impacts competition. The bills also explicitly prohibit anti-competitive behaviors such as price fixing, exclusivity provisions, and general intent to restrain trade.
Most importantly, the Consumer Welfare Standard (CWS) guides courts to focus on the impact to consumers, specifically on changes to output or prices from purported anti-competitive behavior. Under the CWS, the existence of big companies is permissible so long as it benefits consumers through increased output or lower prices. One example of where the CWS has been deployed can be found in the merger of United West Airline and U.S. Airlines. This merger offered enhanced consumer welfare through lower prices and the preservation of unprofitable routes.
Even current guidelines from the FTC and DOJ explicitly state that “the measurement of market shares and market concentration is not an end in itself, but is useful to the extent it illuminates the merger’s likely competitive effects.”
The Sherman Act, the Clayton Act, and the CWS all prioritize behavioral impacts to the competitive process over a firm’s size. If the size is used as a proxy for competitiveness, the new guidelines could hamper innovation by limiting mergers and acquisitions.
The potential for acquisition is a significant incentive for many firms that could potentially be qualified as nascent competitors. A 2020 survey revealed that 58 percent of U.S. start-ups expect to be acquired, and acquisition is a principal incentive for their creation. As shown by research from Bain and Company, acquisitions incentivize entrepreneurs to create start-ups, exit, and then “pour money into the next wave of deals.” Without acquisitions and subsequent investment in new ideas, consumers will miss out on the next wave of innovative products and services.
Small companies benefit from acquisitions as they are provided the resources to grow into competitive players. While Android is a leading mobile operating system provider, it was only able to grow after its acquisition by Google in 2005. The substantial capital that Google was able to provide allowed Android to develop a product that was capable of competing with Apple’s iOS, providing consumers with lower prices and more choice. Re-writing merger guidelines to prohibit acquisitions could ultimately see incumbents face less competition.
Innovation requires substantial upfront costs. Take Google for example. It took the tech giant 3 years to develop and launch the Android operating system. While businesses of the pre-tech era would accumulate their costs from the physical product they would eventually sell, tech companies accumulate their costs with idea development. When Microsoft developed its Windows 3.1 operating system, the development cost was roughly $50 million. Small firms don’t have the capital to operate under this model, and without large firms able to front such high costs, consumers will lose out on future products and services.
Revising merger guidelines to use the size of a firm to determine competitiveness completely ignores the realities of the tech ecosystem. In many cases, mergers and acquisitions have allowed smaller companies to compete and innovate. Changing the rules which enabled small ideas to flourish and consumers to benefit from innovation will only limit the opportunity for acquisitions that benefit consumers and, as a result, may reduce competition, innovation, and ultimately consumer welfare.