In Sunday’s 60 Minutes interview, CBS news correspondent Lesley Stahl highlighted that critics and startups worry that Federal Trade Commission Chair Khan’s approach to competition enforcement is “stifling innovation by spooking investors.” The data clearly spells out this problem—and United States policymakers should fix this issue to give startup innovators in cutting edge technology more room to innovate.
Companies facing competition agency scrutiny can settle, litigate, or abandon merger activity entirely. As American Consumer Institute research explains, settlements are down more than 30 percent under the Biden administration, litigation of disputes is more than twice as likely, and merger abandonment rates have more than tripled.
Competing against other competitors is one thing, but competing with the full weight of Uncle Sam’s regulatory state is another beast entirely. Litigation is expensive and complicated. Defendants must hire lawyers and accountants and then they must divert time and resources away from other pro-competitive market activity to spend time in legal fights. And for all that expense and hassle, competition agency success in the courtroom is down more than a third as the FTC continues to lose landmark cases.
Rather than deal with the expense and hassle of litigation, many startup companies have concluded that it just is not worth it to combine resources and improve efficiency. This explains findings that competition enforcement agencies have reduced acquisitions of small startups by more than 95 percent.
The reality is that competition enforcers at the FTC and DOJ have been fighting a losing battle (literally!) on false pretenses. Although the FTC tends to frame their case as one of cracking down on the big guys, it has been the little guys—and consumers—that have suffered the consequences. After all, it is the Consumer Welfare Standard that the FTC has abandoned that has propelled its losing streak.
Not all startups desire to become the next Amazon or OpenAI. In fact, many are designed with the sole purpose of filling a market need until they are acquired by someone else. That should be a win-win.
Startups meet consumers’ demands with new and fresh ideas, but often lack the resources for commercialization and expansion. When startups are acquired, ideas are paired with resources to spread the product or service to end-users. Meanwhile, that purchase gives startup founders seed capital to start another venture. It is this invest, develop, exit, and reinvest cycle that contributes to a dynamic and diverse marketplace of products and services. Lather, rinse, repeat.
This is especially true in the technology sector where innovation is rapid and unforgiving. Larger technology companies are not bound by as many financial constraints, they compete on the margin of product and service quality. In other words, those that do not innovate are quickly outcompeted and replaced by those that do—and mergers and acquisitions help them compete. As Joe Kennedy of the Information Technology and Innovation Foundation (ITIF) explains, “market leader[s] that merely buys up companies to protect itself from having to innovate will soon be eclipsed by the next new thing.”
And the next new thing is here: rapid advancements in generative artificial intelligence (AI) technologies. Even before the Biden administration tried to change antitrust law with new appointments to lead competition enforcement agencies, the United State had already laid the groundwork for a leadership position in AI—leading the world in the total number of AI startups for the better part of a decade.
But that leadership position was built before the changes in competition enforcement—and the United States is fortunate that it continues today despite villainizing mergers. That is an advantage the United States cannot afford to take for granted.
Logan Kolas is the Director of Technology Policy at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us at www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.