There are mergers to embrace and mergers to worry about in our world. The first category includes alliances between major companies operating in the same industry. These “horizontal” mergers eliminate a rival from the market, freeing prices from competition. Competition authorities will look into the merger in certain situations and may decide to stop it. Other mergers have traditionally been viewed as less problematic. The consequences on competition have been viewed as benign when one company buys another in a related industry (a conglomerate merger) or when a supplier buys a client (a vertical merger).
Antitrust enforcement agencies are contesting an increasing number of non-horizontal mergers. In September, the Federal Trade Commission (ftc) of the United States was unsuccessful in its legal fight against a partnership between Grail and Illumina, a company that develops early cancer-detection tests and offers “next-generation” DNA sequencing technologies. Giphy is a provider of animated GIFs to social media networks, and in October Britain’s Competition and Markets Authority (cma) compelled Facebook to reverse its acquisition of Giphy. On February 8th, the cma released an initial conclusion that the purchase of Activision Blizzard by Microsoft, the company behind the Xbox gaming device, will lessen industry competition.
Anxiety over big tech is a common driver of strict antitrust legislation. Because of the strength of networks, companies like Facebook, Google, and Microsoft quickly dominated their respective marketplaces. As more people used their products, they improved and became more appealing to more consumers. There is a belief among trustbuster circles that large tech should not have been permitted to acquire other companies along the road, despite the fact that it is difficult to criticize such organic expansion on the basis of competition. In many cases, mergers actually benefit the customer.
It is essential to look back to the 1970s in order to comprehend how regulators came to this situation. By using the “one monopoly profit” argument, a group of antitrust experts centered on the University of Chicago challenged the notion that vertical mergers may be detrimental. According to this idea, a monopolist cannot increase or decrease its market dominance along the vertical chain of production. To understand it, picture an airport manager who rents out space to two coffee shops. It will set the rents high enough to only give the stores a competitive return in order to maximize earnings. However, even if the operator were to purchase one of the coffee shops, the rent would still be at a profit-maximizing level (hence one monopoly profit).
Vertical mergers cannot hurt consumers when seen in this light. According to a similar idea, a vertical merger in a sector where each stage of production enjoys some degree of market dominance would result in reduced pricing since one of the non-competitive markups will be abolished. In these situations, one monopolistic profit implies that you won’t be ripped off twice.
Trustbusters nowadays are less concerned about cost. They are more worried that a vertically integrated company would use its power in one link in the supply chain to push out competitors in another. In the Illumina lawsuit, there is worry that competitors of Grail may be prevented from obtaining the DNA sequencing equipment they require to create competitive cancer diagnostics. In the Microsoft lawsuit, there is concern that Activision games would not be allowed, which would harm competition. Sony is the manufacturer of the PlayStation, a platform that competes with the Xbox. Because such limits would likely result in selling fewer goods at least initially, trustbusters would need to show that they would be lucrative before their claim would be taken seriously. Regulators must thus forecast how a market could change.
Which returns the narrative to big tech. Networks’ winner-take-all structure tends to remove rivals for the major tech titans. The supremacy in question cannot be changed substantially by competition policies. The fact that a ton of startups are striving to dethrone established tech giants from their throne should serve as a check on how they do business. However, so-called “shoot-out” acquisitions—the buying of startups that may challenge major tech companies—tend to neutralize any danger from this angle. For many trustbusters, Facebook’s purchase of a young Instagram in 2012 fell within this category. Another regret is that Google’s 2008 purchase of the ad server DoubleClick strengthened its dominance in the digital advertising sector, which is currently the focus of a significant antitrust investigation.
in favor of large corporations
However, it is simple to overlook the fact that the Chicago revolution was a reaction to the arrogant trustbusters who felt large business was inherently bad and that little enterprises, no matter how terrible, should be protected from competition. There have been decades of legal precedents produced by the Chicago School that support the benign nature of non-horizontal mergers. However, some businesses are deterred just by the thought of a legal struggle. In the face of antitrust investigation, chipmaker Nvidia last year dropped its proposed merger with chip designer Arm.
The fact that the cma has taken the initiative to obstruct acquisitions involving powerful digital companies like Facebook and Microsoft is telling. The trustbusters of Britain may now rank among the most dreaded. After the cma was released from the eu’s competition policy in 2020, it revised its rules to give more consideration to potential post-merger market developments. Competition cases are pursued administratively in Britain and Europe rather than in court as they are in America.