Every year, the United States government blocks about 40 proposed mergers due to competition concerns. The government does so after conducting a many-months investigation of the proposed deal, including reviewing hundreds of thousands of pages of internal company documents, interviewing key executives throughout the affected industry, and analyzing data about prices and competition. When that confidential investigation shows that the proposed deal is likely to substantially lessen competition, the agencies move to block it via a lawsuit, and the companies either abandon the deal, try to beat the government in court, or restructure the deal to alleviate the government’s concerns.
The question the government seeks to answer in these investigations–and, ultimately, court cases–is whether the deal is likely to harm competition in the future. This question necessarily puts the government in the position of prognosticator, because before a deal is done, how can we know with certainty whether prices will increase, quality will decrease, innovation will slow, or industries will tend toward collusion? The government makes an educated guess.
These educated guesses are an essential part of competition law and policy in America. Stopping potentially anti-competitive deals from happening protects markets and consumers faster than any after-the-fact court case ever could.
When it comes to the tech sector, merger review is of particular importance, both because the pace of change is so fast and because of the quantity of mergers involving tech companies, numbering hundreds in any given year. In the tech sector, merger review is also of particular peril, as lawyers, economists, and policymakers strive to ascertain what makes this sector different, if anything. At CDT, we are developing criteria that will help assess whether a proposed tech transaction raises competition concerns. Our initial perspective is that questions like the following are likely to be important in assessing transactions:
How might the merger affect the way traffic flows on the internet and how people access the internet?
We want and need an internet on which data flows fast, securely, and freely to everyone. Internet traffic today is handed off among companies as a request flows from the user’s device to the server with the responsive information, whether that be across town, across the country, or across the ocean. Mergers could create incentives to speed up certain data or impede rivals’ ability to route traffic over the internet. When a merger threatens the way traffic flows on the internet, that constitutes a reduction in consumer welfare.1 Similarly, mergers that reduce people’s access to the internet are harmful. For example, if a company wants to buy out a rival that is building new broadband access in a market with few providers, that could harm competition.
Does the proposed deal entrench existing players?
Today, many parts of the tech economy are highly concentrated: there are only a few successful companies in browsers, in search, in e-books, in cable service, and in many other aspects of technology. When deals entrench those existing players, competition can be harmed. So we think it is important to ask questions that get at the likelihood of entrenchment. Will the deal result in more customer lock-in, meaning will it be harder for customers to choose another competitor in the future? After the merger, will there be at least four remaining viable companies in the market? Does the deal erect barriers to data, making it more difficult for competitors to access the key data that may be essential to compete effectively? Does the deal appear to be designed to stave off the threat of competition from an emerging rival, especially one that offers innovative services, lower prices, or a new business model? Is the relevant industry at a competitive tipping point, or likely to be at that point in the near future? If so, how does the proposed merger affect which way the market might tip?
Does the proposed deal affect democracy itself?
Democracy is central to CDT’s very identity. As such, we take a particular interest in mergers that have the potential to affect our democratic process. As an example, we rely on sophisticated machines for the most basic function of democracy–voting–and as such, voting machine mergers should be examined carefully. Proposed mergers that may affect how we vote, how securely we vote, and how expensive it is for municipalities to conduct elections are examples of transactions that raise special concerns. We are also keenly interested in how competition in the digital arena affects political discourse and free expression on the internet. Antitrust law will not always be the right tool to address such concerns, but merger analysis should consider the relevant competition dimensions when they arise.
When the government reviews proposed mergers, it gains access to confidential and highly sensitive data. As a result, no outside organization can have all the information that the government’s lawyers and economists examine in their investigations. But we have experience and expertise on these issues and can help focus merger investigations and conversations on the many factors that affect competition and consumers, especially in the technological arena.
1 “Consumer welfare” is the standard used by the antitrust agencies when evaluating mergers; they challenge mergers that are likely to harm consumer welfare.