Federal Trade Commission
600 Pennsylvania Ave. NW
Washington, D.C. 20580

Department of Justice
950 Pennsylvania Ave. NW
Washington, D.C. 20530

Re: FTC-2022-0003-0001 – Request for Information on Merger Enforcement

On behalf of the R Street Institute’s Technology and Innovation Policy team, I appreciate the opportunity to respond to this Request for Information (RFI) in advance of an anticipated revision of the Federal Trade Commission (FTC) and Department of Justice (DoJ) merger guidelines. [1] The lengthy list of questions posed by the request, combined with public statements and agency actions regarding mergers over the last year, have raised a number of general concerns that we hope may be taken into consideration as the federal antitrust enforcement agencies formulate their revisions.

We particularly hope that as the agencies look to pursue enforcement against illegal mergers more aggressively, they will also take care to maintain a swift and predictable approval process for the overwhelming number of mergers and acquisitions that are harmless or beneficial to consumers. Further, we encourage the agencies to be mindful of the negative impacts on innovation and American leadership in emerging technologies and the digital economy that could result from an overly zealous approach to merger reviews.

  1. Merger Guidelines Should Remain Focused on Harm to Consumers, Not to Competition

As FTC commissioners Noah Phillips and Christine Wilson have observed, the RFI seeks examples of “mergers that have harmed competition,” while containing few callbacks to the consumer harm focus of the current legal framework for antitrust enforcement. [2] One of the reasons the consumer welfare framework came to be in the first place was the unworkable vagueness of what constitutes a harm to competition, as opposed to demonstrating a real or likely harm to consumers in the form of increased prices or diminished innovation or product quality. [3] We would urge the agencies to continue to focus on demonstrable consumer harms rather than the broad theories of market structure and competitor welfare that characterize the antitrust enforcement of many of the United States’ global competitors.

  1. Firm Size and Market Share Alone Are Not Enough to Deem Mergers Anticompetitive

The trend in both populist politics and progressive economics has been to endorse limiting the ability of large tech incumbents to conduct mergers and acquisitions—even non-horizontal mergers—merely based on their size. These calls to limit or even totally ban mergers by the largest tech firms disregard the fact that every one of these large firms faces robust competition along nearly every line of their business, both from smaller competitors and from the other “Big Tech” companies. [4] Indeed, competition over the acquisition of smaller, innovative startups is a key part of how these large incumbents in the digital economy keep their competitive edge, generating both better products for consumers and great wealth for the acquired companies in the process.

Academic studies have shown and continue to show that vertical mergers in particular are generally far more likely to have pro-consumer benefits, which is why both courts and the agencies’ own guidelines have long given them a large measure of deference with respect to enforcement. [5] As the former acting director of the FTC’s Bureau of Competition, Bruce Hoffman, stated, “vertical mergers come with a more built-in likelihood of improving competition than horizontal mergers.” [6] Increasing uncertainty around these beneficial transactions is likely to result in a deadweight loss to the economy in the form of unrealized efficiencies, but unfortunately the FTC in particular has done just this by rescinding the 2020 Vertical Merger Guidelines—an action which, notably, the DoJ has thus far declined to follow.

  1. Merger Enforcement Should Be Humble About Predicting Future Competition and Innovation

The RFI also questions whether new guidelines ought to place more emphasis on the literal text of the Clayton Act in considering whether the result of a merger or acquisition “may be to substantially lessen competition, or to tend to create a monopoly.” [8] This echoes calls by both FTC Chair Lina Khan and Assistant Attorney General Jonathan Kanter to be more proactive about policing potential harms, as the Act suggests.  [9]

The record of both government and private prognostications about the future of competition in a dynamic industry suggests that the agencies should exercise a great deal of caution and humility in defining what transactions may cause anticompetitive harm. This is especially true for emerging technologies, and in relatively young sectors like the digital economy, where we have repeatedly seen large firms subject to intense competition disappearing in the span of a few years when they failed to keep up with changes in technology and the market. [10]

As contemplated by the questions in Section 5 of the RFI, the most direct way to address potential future harms would be to adjust the standards for what transactions are presumptively illegal, whether measured by the acquiring firm’s market share or some other metric. However, tightening presumptions is something that should be done with the utmost of care, because in addition to the concerns raised above, presumptions of harm affect basic considerations of due process of law. As the agencies are always quick to point out, antitrust proceedings are ultimately a law enforcement action, not a regulation, and as such it ought to require a high standard of evidence in order for a firm to be deprived of the right to be held innocent until proven guilty. [11]

  1. Technology Mergers, Including Acquisitions by “Big Tech,” Are Important to Innovation

In a similar vein, Section 7 of the RFI is dedicated to questions about whether there should be increased scrutiny of acquisition of potential, or nascent, competitors. This has been a major concern of the critics of the “Big Tech” firms, which have been accused of conducting “killer acquisitions” in order to eliminate potential competition strategically.

While predatory acquisition for the purpose of stifling competition certainly can exist, evidence for this happening at any scale in the tech industry is scarce at best, whereas the real harms of discouraging beneficial acquisitions are easily demonstrated. [12] In addition to the simple difficulty of making accurate predictions about what small companies might represent a legitimate future competitor to an incumbent, slowing down acquisitions of startups, particularly in the tech industry, poses a threat to venture capital investment and the innovation it fosters. [13]

For entrepreneurs seeking venture capital for a small tech startup, the range of options to deliver a return on what has been invested in them is fairly limited. Venture capital-backed startups succeed at a vastly higher rate (more than 10:1) due to acquisition than due to private growth or going public. [14] Being acquired by a larger firm can deliver both an enormous payout for the startup’s employees and an easy way to scale their product or service to reach a massive audience quickly. Crucially, even delaying an acquisition by a few months due to scrutiny by the enforcement agencies can harm a startup’s chances of getting purchased, which highlights the need for caution in how frequently such reviews are applied.  [15]

  1. Conclusion

In adopting a new set of merger guidelines to suit this administration’s aggressively interventionist economic agenda, the agencies should take into account the effect that discouraging mergers and acquisitions may have on American technological innovation. Mergers, especially non-horizontal mergers, are an essential part of the process by which entrepreneurs and innovators are able to bring their products and services to large national—and international—markets.

We urge the agencies to base revisions to these guidelines on sound economics, recognizing mergers can generate pro-consumer benefits and efficiencies that are at least as important to consider as their potential effects on future competition.

Respectfully submitted,
____________________________
Josh Withrow
Fellow, Technology and Innovation
R Street Institute
1212 New York Ave. NW,
Suite 900
Washington, D.C. 20005
540-604-3871
[email protected]

[1]  “Request for Information on Merger Enforcement,” U.S. Department of Justice and Federal Trade Commission, Docket No. FTC-2022-0003-0001, Jan. 18, 2022. https://www.regulations.gov/docket/FTC-2022-0003.

[2]  “Statement of Commissioners Noah Joshua Phillips and Christine S. Wilson Regarding the Request for Information on Merger Enforcement,” Federal Trade Commission, Jan. 18, 2022. https://www.ftc.gov/system/files/documents/public_statements/1599775/phillips_wilson_rfi_statement_final_1-18-22.pdf.

[3]  For background, see, e.g., Wayne Brough, “Antitrust 2022: Past is Prologue,” R Street Policy Study, No. 249, Jan. 31, 2022. https://www.rstreet.org/2022/01/31/antitrust-2022-past-is-prologue.

[4]  Matthew Lane, “How Competitive Is the Tech Industry?,” Disruptive Competition Project, July 29, 2019. https://www.project-disco.org/competition/072919-how-competitive-is-the-tech-industry.

[5]  Geoffrey A. Manne et al., “The Fatal Economic Flaws of the Contemporary Campaign Against Vertical Integration,” Kansas Law Review, Vol. 68 (2020), pp. 923-973. https://laweconcenter.org/wp-content/uploads/2020/06/The-Fatal-Economic-Flaws-of-the-Contemporary-Campaign-Against-Vertical-Integration.pdf.

[6]   D. Bruce Hoffman, “Vertical Merger Enforcement at the FTC,” Federal Trade Commission, Jan. 10, 2018. https://www.ftc.gov/system/files/documents/public_statements/1304213/hoffman_vertical_merger_speech_final.pdf.

[7]  Office of Public Affairs, “Justice Department Issues Statement on the Vertical Merger Guidelines,” U.S. Department of Justice, Sept. 15, 2021. https://www.justice.gov/opa/pr/justice-department-issues-statement-vertical-merger-guidelines.

[8]  “Request for Information on Merger Enforcement,” p. 2. https://www.rstreet.org/2022/01/31/antitrust-2022-past-is-prologue.

[9]  See, e.g., Lina M. Khan, “The Ideological Roots of America’s Market Power Problem,” The Yale Law Journal Forum, June 4, 2018. https://www.yalelawjournal.org/pdf/Khan_hxxcykpx.pdf;  Office of Public Affairs, “Assistant Attorney General Jonathan Kanter of the Antitrust Division Delivers Remarks to the New York State Bar Association Antitrust Section,” U.S. Department of Justice, Jan. 24, 2022. https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-antitrust-division-delivers-remarks-new-york.

[10]  See, e.g., Ryan Bourne, “Is This Time Different? Schumpeter, the Tech Giants, and Monopoly Fatalism,” Cato Institute Policy Analysis No. 872, June 17, 2019. https://www.cato.org/sites/cato.org/files/2021-03/policy-analysis-872.pdf;  Adam Thierer and Trace Mitchell, “The Crystal Ball of Antitrust Regulators is Cracked,” National Review, July 21, 2020. https://www.nationalreview.com/2020/07/antitrust-regulation-rapidly-changing-marketplace-requires-humility; Josh Withrow, “Antitrust ‘Precrime:’ What Regulators Can’t Know Will Hurt You,” National Taxpayers Union Foundation, Issue Brief, Apr. 21, 2021. https://www.ntu.org/library/doclib/2021/04/Antitrust-Precrime-What-Regulators-Can-t-Know-Will-Hurt-You-1-.pdf.

[11]  See, e.g., Ben Sperry, “The Dangerous Implications of Changing Antitrust Presumptions,” Truth on the Market, Oct. 27, 2020.https://truthonthemarket.com/2020/10/27/the-dangerous-implications-of-changing-antitrust-presumptions; Josh Withrow, “The Burden of Proof for Increased Merger Enforcement Should Fall Upon the Government,” National Taxpayers Union Foundation, Issue Brief, Nov. 3, 2021. https://www.ntu.org/library/doclib/2021/11/The-Burden-of-Proof-for-Increased-Merger-Enforcement-Should-Fall-Upon-the-Government-1-.pdf.

[12]  Joe Kennedy, “Monopoly Myths: Is Big Tech Creating ‘Kill Zones’?” Information Technology and Innovation Foundation, Nov. 9, 2020. https://itif.org/publications/2020/11/09/monopoly-myths-big-tech-creating-kill-zones.

[13]  Devin Reilly et al., “The Importance of Exit via Acquisition to Venture Capital, Entrepreneurship, and Innovation,” Social Science Research Network, Feb. 10, 2022. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3981970.

[14]  Jeff Farrah, “Restrictions on acquisitions would stifle the US startup ecosystem, not rein in big tech,” TechCrunch, May 19, 2021. https://techcrunch.com/2021/05/19/restrictions-on-acquisitions-would-stifle-the-us-startup-ecosystem-not-rein-in-big-tech.

[15]  Ibid.; Reilly et al. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3981970.