DIGITAL PLATFORM COMPETITION, MERGER CONTROL, AND THE INCENTIVE TO INNOVATE: DON’T KILL THE GOOSE THAT LAYS THE GOLDEN EGG

By John Ceccio and Christopher Mufarrige¹

The purpose of the antitrust laws is to promote competition and innovation for the benefit of consumers.² Recently, there has been a growing chorus of critics who subscribe to the idea that acquisitions by large digital platforms are detrimental to this purpose. The common belief among these critics is that current antitrust law is ill-equipped to address transactions in digital markets. Much of this sentiment focuses on transactions where large digital platform firms acquire technology-focused start-ups. These interventionists argue that past transactions of start-ups have harmed competition and innovation because, by purchasing nascent competitive threats, platform incumbents eliminated much needed competitive constraints. Taken together, they argue that this course of conduct impedes incentives to innovate and ultimately harms consumers.

In response to these perceived problems, critics assert that antitrust merger enforcement should be less forgiving when scrutinizing large firm acquisitions and that potential legislative action is needed. Importantly, these types of changes to the antitrust laws would make it harder for venture capital-backed companies to be acquired. This raises two important questions: (1) do the current proposals promote competition, innovation, and consumer welfare; and if not, (2) are extant antitrust principles capable of effectively addressing large technology firm’s purchasing alleged nascent competitive threats?

The short answers are no and yes. First, critics fail to fully appreciate the unintended negative consequences their proposals will have on the innovation ecosystem as a whole. Put simply, if the critics’ proposals were enacted, the incentives for innovation and growth would be severely curtailed and the capacity for future innovation and growth would be in doubt. Second, the fundamental principles of extant antitrust merger enforcement are sound, and the current legal and analytical frameworks are sufficient to combat potentially anticompetitive acquisitions of smaller, adjacently related start-ups. While there is certainly room for more empirical research to better understand digital markets,³ any change in the law must first aim to do no harm or, in other words, not kill the goose that lays the golden egg. The sections that follow describe: (1) the recent literature surrounding the debate; (2) the various regulatory proposals; (3) why those proposals are flawed; and (4) why existing merger enforcement principles are up to the task.

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I. MERGER ACTIVITY AND BUSINESS DYNAMISM

The calls for increased scrutiny of small tech transactions stem from the growing commentary around large firms acquiring nascent competitive threats and the perceived fall in business dynamism. The various theories of harm related to nascent competition allege that, absent acquisition, the small start-up could have grown to provide an important competitive constraint on the large superstar digital platform, or that the large superstar firm would have innovated organically to develop its own competing product or service. In either case, the theories contend that competition and innovation in the particular market and adjacently related markets would have been better off without the transaction.

Besides the alleged softening of competition in the merging parties’ markets, critics also argue that such acquisitions reduce business dynamism and innovation.⁴ Specifically, these critics argue that platform incumbents have maintained their dominant positions, in part, because start-ups are funded with a latent intention to ultimately sell to a large firm.⁵ They further argue that, because of the incentive to sell to and integrate with a large firm, innovative start-ups tend to compete to develop platform complements as opposed to competing for the platform itself.⁶ Critics claim that this has a deleterious effect on business dynamism and innovation incentives, thereby harming consumers.⁷ Some proposals have even called for legislation to alter venture capital investment incentives as a means to promote direct competition against digital platform incumbents.⁸,⁹ The following sections outline the commentary around each of these topics.

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A. The Theories And Concepts Underlying Nascent Competitor Transactions

The commentary and proposals to upend current merger enforcement principles come partly from the belief that the antitrust laws are ill-equipped to address large digital platforms acquiring small, but growing technology-focused firms. While discussion on the topic is plentiful, definitions and theories of harm often get incorrectly intertwined and misconstrued.

1. Nascent Competition Vs. Potential Competition

As an initial matter, the concepts of "nascent competitor" and "potential competitor" are not the same. This is important because US antitrust law has developed standards to analyze "potential competitor" transactions, which would make challenges to even anticompetitive mergers exceedingly difficult if applied to "nascent competitor" transactions.¹⁰ Thus, given the high level of concern over digital platform dominance, current potential competition doctrine seems too strict and is nonetheless inapplicable given the difference in the two concepts.¹¹

The term "potential competitor" is typically defined as a firm that is predicted to have an undifferentiated or slightly differentiated product that will compete in the acquiring party’s market at some point in the future, but does not do so currently.¹² In contrast, the concept of "nascent competitor" stems from the holding and reasoning in the seminal Microsoft case.¹³ There, the court describes the concept as a differentiated product or technology that exists as a competitive threat to the incumbent but has not yet fully matured into a significant competitor.¹⁴ In other words, a nascent competitor may be characterized as a product or service that satisfies a consumer’s underlying need for the incumbent’s current product in a new and innovative way.¹⁵

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While the definition of a nascent competitor is still somewhat in flux, it is well settled that the term conveys that the company has created an innovative product. Consequently, it is helpful to understand the different approaches firms take to innovation. But rather than looking at innovation from the perspective of existing markets and developing technologies—it is more useful to follow battle-tested antitrust analysis and view competition from the eyes of consumers. Specifically, when thinking about the nascent competitor concept, it helps to frame the analysis around the solution or service the innovator is attempting to provide in response to current—or anticipated future—consumer needs and preferences.¹⁶ Innovation framed this way falls into three buckets:

• (innovation that offers a breakthrough solution to existing consumer demands;
• (innovation that redefines an existing solution to consumer demands and preferences; and,
• (innovation that anticipates or creates future consumer demand and seizes a brand-new opportunity.¹⁷

A category one innovator is the prototypical nascent competitor. Think of the music industry. CDs were a breakthrough solution (over cassette tapes) satisfying consumer demand regarding storing and replaying sound recordings. Thus, at its very early stages, CD companies were nascent competitive threats to the cassette industry.

A category two innovator may, but does not always, constitute a nascent competitor.¹⁸ The determination rests on the amount of demand the innovative new product or service could divert from the existing industry, as well as the competitive constraint the newly defined product will have on the incumbent industry.¹⁹ Innovation strategies that redefine an existing industry problem and solve the redefined problem lead to both disruptive and nondisruptive creation. By slightly redefining the problem, a category two innovator can shift industry boundaries in creative ways. Take the Nintendo Wii, for example. The console redefined the problem the video game industry had long focused on from how to deliver the best graphics, to how to deliver an easy-to use video-game system that combined the movement of physical sports with family-friendly games everyone could play together at home.²⁰ The Wii’s family-focused environment was easy to navigate and its operation was governed by motion, not button-pushing. The Wii pulled a slice of demand from the existing video game industry, "creating an element of disruption, but it also expanded the industry in a nondisruptive manner by attracting a mass of people—from young children to senior citizens—who had never played video games."²¹

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On the other end of the spectrum is a category three innovator. This type of innovator is not properly characterized as a nascent competitor. A category three innovator creates new markets beyond industry boundaries, rather than eating at the margins or the core of existing industries. At its inception, Sesame Street was a category three innovator. It created a brand-new opportunity that unlocked a new market of preschool edutainment without replacing preschools or libraries.²²

2. Killer Acquisitions

The Killer acquisitions theory is a variation on the more general nascent competitor theory of harm. The term "killer acquisition" comes from the title of a 2019 paper by Yale economists Colleen Cunningham, Florian Ederer, and Song Ma.²³ Cunningham et al. describe a killer acquisition as a case in which the acquiring firm’s strategy is "to discontinue the development of the targets’ innovation projects and preempt future competition."²⁴ The paper concludes that the acquiring party exited the competing project in approximately 5% to 7% of the transactions examined. Thus, according to the authors, "[i]ncumbents acquire firms with overlapping drug projects and . . . these acquired drugs are less likely to be developed, particularly when they overlap with the acquirer’s product portfolio and when the acquirer has strong incentives to protect his existing market power."²⁵

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3. Zombie Acquisitions

In a "zombie’ acquisition," the acquiring company keeps alive the target’s early-stage product but foregoes further development and may explicitly starve it of resources to grow.²⁶ Hence, while related to the "killer acquisition" theory, instead of killing the competing product, the acquiring firm continues to offer the product in a zombie-like fashion.

4. Reverse Killer Acquisitions

Commentators have recently built on the "killer acquisition" concept and raised a distinct but related theory under the modified label of "reverse killer acquisition."²⁷ A "reverse killer acquisition" refers to a situation where a large digital platform purchases a smaller tech start-up instead of developing its own competing offer organically.²⁸ The theory highlights how acquisitions often encompass a "buy vs. build" decision where the incumbent must decide whether it is advantageous to build the functionality itself or purchase it from a start-up that has already successfully entered the market. More specifically, the commentators explain that large digital platforms "have exceptional abilities to pursue organic expansion but also opportunities to "roll up" (willing) startups to "get there faster," "buying" instead of expending effort in rival innovation."²⁹ Consequently, foregoing such effort could eliminate strong competitive constraints in the market by allowing the incumbent to "do away with its own innovation effort, and reduce innovation overall relative to a "no deal" scenario."³⁰

B. The Perceived Fall of Start-Ups And Business Dynamism

In addition to the narrative around nascent competitors, commentators critical of current merger enforcement also point to the alleged lack of business dynamism as proof of the need to adopt more stringent merger regulations. For example, a recent paper authored by three University of Chicago economists constructs a theoretical model of investment incentives to support the notion that nascent acquisitions lead to reduced incentives to invest in start-ups.³¹ The authors posit that the effect occurs because the prospect of acquisition discourages early adoption of nascent products, which results in higher entry barriers that make nascent firms less attractive to investors.³²

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Similarly, a report published by the Brookings Institution uses U.S. Census Bureau data to support its claim that start-up activity has declined over the past decade.³³ The report contends that the decline in business dynamism is "both a symptom and a cause of declining market competition."³⁴ In support, the report points to evidence that "[s] tart-up rates are declining across all sectors," "[t]he employment share of young firms has decreased by more than one-third since 1987," "[b]usinesses are taking longer to form, while business applications have declined," and "[t]he entrepreneurship rate has fallen by almost half for workers with a bachelor’s degree."³⁵

II. PROPOSED ACTIONS

The issues discussed above have led to various commentary and legislative proposals aimed at making it more difficult for large digital firms to acquire small tech-focused startups. The current antitrust framework looks to strike the right balance in approving procompetitive transactions while preventing anticompetitive ones.³⁶ However, many tech interventionists believe antitrust needs a re-balancing and that we should adjust its principles to raise the risks and costs associated with acquisitions by large firms. For example, the Stigler Center report proposes a notification and preclearance requirement "for any acquisition by a business designated as having bottleneck power."³⁷ The report argues that "[w]hen network effects are strong, a digital business with bottleneck power will likely only have very small competitors. Therefore, even small transactions can neutralize an important potential competitor that is poised to grow."³⁸ In the same vein, prominent antitrust economist John Kwoka has argued that the agencies should implement a strict structural presumption to block mergers that would breach a specific market share percentage.³⁹ This would contradict current agency practice, and is in tension with extant empirical evidence that does not suggest there is a causal link between market concentration and economic performance.⁴⁰

Moreover, critics have not restricted their calls for reform to antitrust per se. A recent paper by distinguished Stanford Law Professor Mark Lemley and Andrew McCreary proposes a combination of "carrots" (regulatory incentives to make IPOs more attractive for start-ups and investors) and "sticks" (regulatory costs to discourage and perhaps prevent acquisitions of startups by dominant technology platforms).⁴¹ They argue that the increasingly common exit strategy of startups to cash out through an acquisition, instead of an IPO, hampers economic growth and entrenches the platform’s dominance by eliminating nascent or potential rivals, thereby depriving consumers access to the startup’s innovative technologies.

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Recently, Columbia Law professor Tim Wu took the call even further by suggesting that antitrust law should impose market share caps.⁴² That is, companies should be prevented from growing past a certain market share percentage regardless of the value they create for consumers. In his view, clearer guidance on impermissible market shares could improve antitrust enforcement. Wu cites The Department of Justice’s 1968 merger guidelines as a guide. There, the government would challenge transactions when both the acquiring and acquired firm had a market share of just 4% or more.

Legislators have also joined the discussion. Fueled by populist sentiment, Senators Elizabeth Warren and Amy Klobuchar have put forth far-reaching proposals to respond to the rise of "big tech" through legislation. Put simply, their plans would upend the principles undergirding current merger enforcement. Senator Warren’s proposal aims to break-up what she calls "platform utilities," which she defines as ‘[c]ompanies with an annual global revenue of $25 billion or more and that offer to the public an online marketplace, an exchange, or a platform for connecting third parties."⁴³ The definition unsurprisingly encompasses today’s large digital platforms. This would mean that our most innovative companies would no longer be allowed to integrate with complementary assets that participate on their platform. Under the Warren proposal, large digital platform firms would need to divest many of their in-house products, including the ones they offer for free. The proposal goes as far as to single-out certain acquisitions such as Amazon/Whole-Foods, Facebook/Instagram, and Google/Waze, as transactions that need unwinding.

Senator Klobuchar’s plan does not call for the break-up of large firms, nor does it effectively ban mergers, but it does propose significant changes to the time-tested principles governing antitrust merger enforcement.⁴⁴ Current merger enforcement principles place the burden of proof on the government when challenging a transaction.⁴⁵ That is, the government must prove that the transaction is substantially likely to lessen competition in the alleged market.⁴⁶ The Klobuchar proposal would flip this on its head. First, it seeks to lower the standard of proof from "substantially" lessens competition to "materially" lessens competition. The amendment would significantly change Section 7 of the Clayton Act and reduce the government’s burden, making it easier for agencies to successfully block transactions by large companies. Second, the plan proposes to "[s] hift[] the Burden of Proof so that powerful companies that have a market share of greater than 50% or that otherwise have substantial market power would have to prove" that their alleged "exclusionary conduct" does not present an "appreciable risk of harming competition."⁴⁷ Moreover, the Klobuchar plan is not industry-specific (unlike the Warren plan). Thus, it would have far-reaching effects across all M&A activity, regardless of industry or deal size.

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III. DISRUPTING THE INNOVATION ECOSYSTEM

While well intentioned, the proposals described above do not fully appreciate the disincentive effects of instituting a regulatory scheme that deters large platforms from purchasing smaller tech-start-ups. Moreover, the data cited to support the notion that business dynamism has declined, and that acquisitions and conduct by digital platforms is partly to blame, fail to accurately reflect available evidence.⁴⁸ The discussion below describes: (1) the importance of understanding platform competition compared to platform innovation; (2) evidence suggesting that business dynamism is flourishing; (3) the positive externalities large digital firms provide to smaller acquired start-ups; and (4) the unintended consequences of implementing a scheme that disincentivizes large firms from acquiring start-ups. Overall, current proposals aimed at improving competition and innovation will likely do neither.

A. Platform Competition Vs. Platform Innovation

Before altering investment incentives and increasing scrutiny of smaller competitor transactions, it is essential to understand the nature of platform competition and innovation.⁴⁹ Two important concepts inform our understanding of digital platform dynamics: network effects and modularity.⁵⁰ These two concepts work together to create an environment where competition and innovation occur at both the platform and component levels.⁵¹ More specifically, understanding these characteristics of digital platform competition is important when tailoring a policy regarding acquisitions of smaller competitors, because the harm from disincentivizing investment in complementary products for the platform likely outweighs the benefits policymakers expect to gain from incentivizing investment to compete for the platform.

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1. Network Effects

A platform exhibits network effects when the value of the platform to one user increases as more users join and expand the reach of the platform.⁵² Network effects arise due to complementarity between the nodes in a network.⁵³ A node can be a consumer, app developer, merchant, website, or any other entity that interacts on the platform. The value that consumers and the platform owner create increases with network size, resulting in a positive feedback loop.⁵⁴ These network effects, viewed as an essential feature of platforms, reflect interdependence of demand between nodes on the platform, and shape competition for the platform market. Platform economics helps explain why entrants compete fiercely to innovate, as some platforms become dominant, and may even give rise to "winner-take-all" outcomes under specific conditions.⁵⁵ But the expansion of the network provides tremendous benefits to participants, including consumers. Moreover, competition and innovation for the platform ignores the important aspects driving competition on the platform itself, which is equally, if not more, important in terms of benefits to consumers.

2. Modularity

Economists discussing platforms typically take the platform as exogenous and fixed, leaving important characteristics undiscussed—such as how, and in what ways, complementary nodes interconnect to the platform.⁵⁶ To understand these relationships, we must examine the idea of modularity. Digital platforms are standardized architectures that divide complex systems into modules and rely on interfaces that link these modules.⁵⁷ Rather than a single actor managing the development of the technology, modular platforms represent a decentralized approach to managing complexity.⁵⁸ With modularity, platforms provide an incentive to third-parties to experiment and improve the consumer experience, so long as the component complies with the standardized interface.⁵⁹ In so doing, platforms allow multiple actors to pursue parallel innovation, which can improve the quality of the technical solution as well as increase the rate of technological change.⁶⁰ Moreover, the decentralized approach allows individual entrepreneurs to leverage their knowledge of particular consumer preferences to improve the overall platform experience.⁶¹

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3. The Tradeoff

The common mistake commentators make when proposing policy responses to combat the alleged market power by digital platforms is thinking that regulatory action to increase competition for the platform will ultimately result in better outcomes for consumers. Sadly, it is not that simple.⁶² While current proposals may increase incentives to compete and innovate for the platform, they diminish incentives to compete and innovate on the platform.⁶³ Put differently, to warrant an increase in the former, critics of current antitrust law must not only marshal forward evidence that current antitrust law fails to detect otherwise anticompetitive mergers, they must also present evidence that the reduced consumer benefits from a reduction in competition on the platform is outweighed by tangible consumer benefits by an increase in competition for the platform.

Because digital platforms are modular architectures, the value the platform creates for consumers and society is largely a function of the number of components that can plug into it.⁶⁴ A component can be a website, a merchant, an application, another individual, or any type of node that increases the overall complementarity of the platform.

A system that looks to incentivize platform competition over platform innovation will tend to lead to an outcome where entrepreneurs and investors devote their resources to developing competing platforms.⁶⁵ This could lead to worse outcomes for consumers for several reasons. First, if resources are devoted to creating competing platforms, there is a higher likelihood of incompatibilities, which leads to increased switching costs for consumers and increased development costs for component makers. Moreover, with increased development costs comes decreased incentives for investment into platform complements. And because the value of a platform stems largely from the number of complements or nodes that can plug into the platform, the overall value of a platform in such an environment will tend to be lower, thus, reducing value and usefulness to consumers and society as a whole.

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B. Business Dynamism And Venture Capital Investment Is Flourishing

The theoretical case for singling out acquisitions of small start-ups generally, much less in the area of big tech, is underwhelming at best. And the available empirical evidence regarding venture capital funding only further undermines the case for greater intervention. The data often pointed to by critics to support the notion of declining business dynamism are particularly weak due to its reliance on US Census data. Census data are wildly over-inclusive for the purpose of antitrust analysis. Under the Census, a "firm" is defined as "a business organization consisting of one or more domestic establishments that were specified under common ownership or control." And the term "startup" includes any "firm" with an age of zero. Therefore, "start-ups" can include any business, such as a restaurant or retail store, which is uninformative when it comes to nascent competition analyses.

Nonetheless, while it is true that venture capital exits are increasing, the increase is caused by private equit y buyouts rather than acquisitions by large technolog y platforms.⁶⁶ And it is also true that the buyouts are increasingly focused on the tech sector. Now, critics of big tech look at these data and claim that they result from either "kill zone" style buyouts or motivated by some other anticompetitive purpose.

But these general claims rely on a myopic understanding of the data. For example, if the critics are right and lax antitrust laws have motivated and inspired many, if not most, of these purchases, we would expect places like the EU to outshine American performance in important ways—but the data do not support this claim at all. As a general matter, it is difficult to discern whether an increase in concentration results from anticompetitive behavior or more efficient firms having greater success. Indeed, perhaps the most important lesson of the 1970s and 1980s structural debates in antitrust economics was that concentration and competition mean different things⁶⁷ and that a concentrated market can still be highly competitive and contestable. Indeed, the extant empirical evidence does not appear to suggest that there is a causal link between market concentration and economic performance.⁶⁸

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Though the structure-conduct-performance paradigm has been making a comeback in populist circles, a recently released paper appears to have demonstrated once again that greater market share does not inexorably lead to negative outcomes for consumers. In fact, MIT Professor David Autor and his coauthors’ recent research flatly contradicts these claims.⁶⁹ Quite the opposite, Autor et. al., find that increased productivity by firms explains the recent increase in concentration:

If globalization or technological change push sales towards the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms.

The authors specifically find that the industries concentrating the fastest are the ones with the fastest productivity growth. Perhaps most importantly, the authors find these effects across international jurisdictions—ruling out the possibility that more lax antitrust scrutiny in some jurisdictions is causing the structural changes.

That is not all. The U.S. also happens to lead the world in R&D investment, far exceeding the investments by companies in the EU.⁷⁰ Moreover, the U.S. is home to the highest percentage of "unicorn" firms (startups valued at $1 billion or more) worldwide, with the EU representing only a declining minor share.⁷¹

C. Benefits From Acquiring Complementary Technologies

Small start-ups and consumers benefit immensely from digital platforms acquiring developing technologies. While the current proposals and commentary frame the discussion around speculation that these acquisitions prevent what could lead to direct competition with the platform incumbent, they fail to fully acknowledge the many real financial and operational synergies from integration. As Cunningham et. al make clear, acquisitions of innovative start-ups in the early stages of development by established firms can be procompetitive.⁷² The authors reason that "firms who are better at exploiting technologies acquire innovative targets to realize synergies, effectively enabling specialization and subsequently increasing innovation and overall welfare."⁷³ Consequently, while a small percentage of start-up acquisitions may result in the exit of a competing project, procompetitive motivations overwhelmingly drive the transaction rationale.⁷⁴

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The integration of a new technology or functionality from a smaller start-up onto the acquiring firm’s platform tends to reduce costs, drive new features, and create a "one-stop shop" for consumers.⁷⁵ Consequently, a large platform can offer the small start-up scale that is otherwise unachievable.

Being acquired by a large digital platform may also give the start-up much-needed access to capital.⁷⁶ Startups often face limits on both raising and deploying capital to invest in the business. Without adequate capital and cashflow, the innovative start-up will often have difficulty hiring and competing for the technical talent it needs to succeed. Additionally, while small firms are maturing, they are unable to efficiently deal with regulatory costs. For example, the passage of GDPR has made it prohibitively costly to operate a data-enabled business model.⁷⁷ Thus, integration with a larger platform helps the small start-up receive the capital and know-how to eliminate these costs and continue doing what it does best—innovating.

D. Unintended Consequences Of Disincentivizing Start-Up Acquisitions

Venture capital financing is a pillar of American innovation.⁷⁸ Many of America’s best-known public companies such as Amazon, Apple, FedEx, Intel, Microsoft, and Starbucks, began as VC-backed firms. Recent proposals that have the effect of disincentivizing start-up transactions take for granted this well-functioning ecosystem and may upend its welfare-enhancing incentive structure.⁷⁹

Venture capitalists play a substantial role in funding high-risk, technology-based business ventures. To compensate investors for their risk taking, they demand a specific target rate of return.⁸⁰ The return materializes most often in one of two "exit options": acquisition or initial public offering (IPO). Indeed, salutary ex ante incentives that facilitate venture financing and start-up formation is predicated on the ability to exit. That being said, the evidence suggests that acquisition is seen more and more as the preferred exit option. In fact, recent data show that roughly two-thirds of successful exits in the United States came from acquisitions compared to one-third from IPOs.⁸¹ While the reasons for this have not been fully investigated, the evidence suggests it could be because IPOs typically involve: (1) high underwriting and regulatory fees; (2) a longer runway before profits are realized; and (3) uncertainty in public market pricing.⁸²

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Regardless of the reason why investors exit the way they do, the fact that start-ups tend to rely on acquisition to exit means that the innovation ecosystem depends on maintaining acquisition as a reasonably unencumbered option. The prospect of being acquired can provide a valuable ex-ante incentive for entrepreneurs and investors to spur innovation and create businesses that would otherwise never be born.⁸³ As even Cunningham et al. acknowledge"[i] t is possible that the presence of an acquisition channel also has a positive effect on welfare if the prospect of entrepreneurial exit through acquisition (by an incumbent) spurs ex-ante innovation."⁸⁴ For this reason, a regulatory scheme that disincentivizes acquisitions of startups, and for example, promotes IPOs instead, potentially reduces the ex-ante incentive for entrepreneurs to innovate and form new start-ups.⁸⁵ Thus, proposals that either per se prevent acquisitions of smaller firms, or raise the regulatory risks of doing so, will make future innovative projects and idea origination less attractive to investors and entrepreneurs.

To see why, we must understand the valuation principles driving venture capital investment decisions.⁸⁶ Recall that an investor has either an implicit or explicit target rate of return when deciding whether to take a project. In the case of a venture-backed company, that target rate of return is a function of the enterprise value of the firm at exit, which is calculated based on the firm’s capacity to generate future cash flows, and the uncertainty associated with these cash flows. Thus, from the investor perspective, the ability to generate future cashflows is largely tied to the ability to exit. If the ability to exit becomes more uncertain due to heightened regulatory scrutiny, the probability of future cash flows becomes less certain to the investor. And as the exit cash flow amount becomes less certain, or risker, the target rate of return required to incent new projects increases. At an increased target rate of return, investors may choose to forego projects taken under the current antitrust framework because they now expose the investor to a level of risk he or she is unwilling or unable to swallow. In turn, entrepreneurs may not be able to find the financing for their risky business ideas, or if they do, they will have to give investors a larger stake in the company to compensate for their increased risk. This will tend to result in less entrepreneurial idea origination because the return to the entrepreneur in terms of money, time, and effort, will no longer be worth it. And as idea origination weakens, venture capitalists invest less into startups, creating a negative feedback loop that is harmful to innovation, and ultimately, consumers.

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IV. CURRENT ANTITRUST LAWS ARE UP TO THE TASK

The fundamental principles of antitrust merger enforcement are sound. And the current legal framework provides sufficient tools for preventing anticompetitive transactions that involve small tech start-ups, killer acquisitions, nascent competitors, potential competitors, or any other type of alleged anticompetitive combination. While merger enforcement could always benefit from more knowledge and information related to any particular market, much less digital markets, that does not mean the principles and framework are broken. In fact, both the Horizontal Merger Guidelines ("HMG"), and the newly minted Vertical Merger Guidelines ("VMG"), touch on principles to assess transactions involving small but nascent competitors.

Section 6.4 of the HMG, titled "Innovation and Product Variety," explicitly outlines some of the types of harms recent commentary and proposals hope to protect against.⁸⁷ Moreover, the guidance document states that agencies can and will evaluate a transaction based on "the extent to which successful innovation by one merging firm is likely to take sales from the other, and the extent to which post-merger incentives for future innovation will be lower than those that would prevail in the absence of the merger."⁸⁸ While one can appreciate the common response that current case law prevents using such theories, it ignores the fact that we cannot know if such tools work if they have not yet been tested. Thus, before moving to adopt new laws and regulations, we first must at least attempt to exhaust the tools we do have.

Moreover, even if there were doubts about the applicability of the HMG to transactions involving adjacently related businesses, the recently published VMG closes that gap with its discussion around "merger of complements," "two-level entry," and "diagonal" mergers.⁸⁹ Although not vertical per se, these concepts were likely adopted with nascent competition in mind. The document states clearly on page one that:

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These Guidelines describe how the agencies analyze a range of non-horizontal transactions. Where they use the term "vertical," that term should not be read to narrow the applicability of these Guidelines. The analytical techniques, practices, and enforcement policies described in these Guidelines apply to strictly vertical mergers (those that combine firms or assets at different stages of the same supply chain), "diagonal" mergers (those that combine firms or assets at different stages of competing supply chains), and vertical issues that can arise in mergers of complements.⁹⁰

The merger of complements concept likely follows the adoption of conglomerate effects introduced in the United Kingdom in 2010.⁹¹ Conglomerate effects refer to a situation where the merging firms’ products are not in the same product market, nor are they inputs or outputs of one another. Such mergers could enable tying and bundling strategies that foreclose competition, enable price discrimination, or soften competition among firms. Thus, the discussion on mergers of complements in the VMG provides a reasonable framework to respond to any alleged issues resulting from acquisitions of nascent competitors that double as complements or give rise to conglomerate effects.

Moreover, the VMG codify the "two-level entry" theory of harm, asserting that vertical mergers can raise entry barriers by effectively requiring new rivals to enter both the upstream and downstream markets simultaneously.⁹² Moving forward, the agencies now have express authority to investigate and bring cases under such a theory, should they deem it appropriate for the facts of the case.

Similarly, the VMG also outlines a theory of harm related to what it calls a "diagonal merger." It defines a "diagonal merger" as "those that combine firms or assets at different stages of competing supply chains." While the guidelines do not explicitly explain the theory of harm, the agencies illustrate it through an example where a company acquires control over an input that it does not use in its own products or services, but which is important to its competitors.⁹³ This was likely adopted to address current commentary around suites of digital products and ecosystems.

Ultimately, the VMGs put the bar and business community on notice that transactions involving adjacently related business are subject to agency scrutiny, despite a lack of horizontal overlap or increase in concentration. While some critics may wish the VMG went further,⁹⁴ it nonetheless provides the agencies with ample room to make an evidence-based inquiry of any transaction that might tend to harm competition or innovation. Of course, when analyzing these novel theories, the agencies must thoroughly assess the available empirical evidence and factual record.

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The existing empirical evidence suggests that many vertical and conglomerate transactions are in fact procompetitive.⁹⁵ This is not to say that they are always procompetitive,⁹⁶ but that based on theory and empirical evidence, conglomerate and vertical acquisitions should not be looked at with quite the same skepticism as a horizontal transaction that eliminates a direct competitor. This is particularly important in regard to complementary technology because, as the discussion above illustrates, such transactions have far-reaching benefits outside just the effects in the merging parties’ markets.

V. CONCLUSION

In the overwhelming majority of cases, current principles and frameworks have led to the right outcome. If there is to be any adjustment, it should only be at the margins in the application of the law, and leave the legal and analytical frameworks untouched. As George Mason professor John Yun correctly notes, the relevant question for antitrust policy is whether competition agencies are systematically biased in approving anticompetitive mergers, or blocking procompetitive mergers.⁹⁷ Current antitrust law continues to be up to the task of incorporating new evidence and applying it to evolving markets. No doubt, agencies should continue to invest heavily in learning about edge technologies and stay abreast of new business developments—but the current framework is capable of doing just that. Existing merger enforcement principles have not led us astray just yet, so we should be careful not to kill the goose that lays the golden egg.

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——–

Notes:

^1. John Ceccio is a law clerk in the Washington, D.C., office of Wilson Sonsini Goodrich & Rosati, where he is a member of the antitrust group. Chris Mufarrige is an associate in the Washington D.C. office of Wilson Sonsini Goodrich & Rosati, where he is also a member of the antitrust group. He was previously a senior adviser in the Director’s office at the Consumer Financial Protection Bureau.

^2. See, e.g., Joseph F. Brodley, The Economic Goals of Antitrust: Efficiency, Consumer Welfare, and Technological Progress, 62 N.Y.U. L. Rev. 1020, 1021 (1987); J. Thomas Rosch, Monopsony and the Meaning of Consumer Welfare: A Closer Look at Weyerhaeuser, 2007 Colum. Bus. L. Rev. 353, 353 (2007); Joshua D. Wright & Douglas H. Ginsburg, The Goals of Antitrust: Welfare Trumps Choice, 81 Fordham L. Rev. 2405, 2406 (2013); Carl Shapiro, The Consumer Welfare Standard in Antitrust: Outdated, or a Harbor in a Sea of Doubt, Prepared Remarks to the Senate Judiciary Committee Subcommittee on Antitrust, Consumer Protection and Consumer Rights, December 13, 2017 ("Furthermore, those who say that the ‘consumer welfare’ standard is narrowly focused on price to the exclusion of other factors are simply incorrect: properly applied, the ‘consumer welfare’ standard includes a range of factors that benefit consumers, not just low prices but improved product variety and product quality and of course more rapid innovation.").

^3. See 6b order, available at https://www.ftc.gov/reports/6b-orders-file-special-reports-technology-platform-companies.

^4. Mark A. Lemley & Andrew McCreary, Exit Strategy (Stanford Law & Econ. Olin Working Paper #542, 2019), https://ssrn.com/abstract=3506919; Kevin Bryan & Erik Hovenkamp, Antitrust Limits on Startup Acquisition, Rev. Ind. Organ. 56, 615-636 (2020); Stigler Center For The Study Of Economy And The State, Stigler Committee On Digital Platforms Final Report 111 (2019) [hereinafter Stigler Report].

^5. Kevin Bryan & Erik Hovenkamp, Antitrust Limits on Startup Acquisition, Rev. Ind. Organ. 56, 615—636 (2020) ("When startups can choose what kind of technology they invent, they are biased toward inventions that improve the leader’s technology rather than those that help the laggard incumbent catch up. Further, upon obtaining a pure monopoly, the leading incumbent’s marginal willingness to pay for new technologies falls abruptly, which diminishes private returns on future innovations.").

^6. Id.

^7. Id.; see also, Lemley & McCreary, supra note 4, at 7 ("But one party is left out of this equation: the consumer. Incumbents pay—can afford to pay—even for technologies they don’t use because eliminating potential competitors keeps their profits high. But doing so also eliminates much of the promise of startup innovation for the economy.").

^8. Sai Krishna Kamepalli, Raghuram Rajan & Luigi Zingales, Kill Zone, NBER Working Paper No. 27146 (May 2020); Mark A. Lemley & Andrew McCreary, Exit Strategy (Stanford Law & Econ. Olin Working Paper #542, 2019), https://ssrn.com/abstract=3506919.

^9. Elizabeth Warren, Here’s How We Can Break Up Big Tech (May 8, 2019), https://medium.com/@teamwarren/heres-how-we-can-break-up-big-tech- 9ad9e0da324c.

^10. Jonathan Jacobson & Christopher Mufarrige, Acquisitions of "Nascent" Competitors, Antitrust Source at 25 ("Given the high level of current concern over technology firm dominance, the Marine Bancorporation requirements seem too strict.").

^11. Although this paper does not discuss the standard that should apply to nascent competitor transactions, see Jonathan Jacobson & Christopher Mufarrige, Acquisitions of "Nascent" Competitors, Antitrust Source and Scott Hemphill & Tim Wu, Nascent Competitors, (U. Penn. L. Rev. 2020 (forthcoming 2020) for distinct but thoughtful analyses.

^12. The markets and companies in question in the two leading potential competition cases serve as useful guides to clarify the concept. In United States v. Falstaff Brewing Corp., the case involved an acquisition between Naragansett Brewing Co., the largest seller of beer in New England, and Falstaff Brewing Corp, a brewer operating outside of New England. The question presented was whether Falstaff was a potential entrant into the New England beer market, and if the acquisition, by eliminating Falstaff’s perceived ability to enter, deprived the market of an important competitive constraint. Most important for the analysis here is the merging firms’ products and the type of potential competition in question. Falstaff was not an innovative company, nor did it provide a substantially differentiated product from Narragansett. Thus, the potential competition analyzed in the case concerned entry of a marginally differentiated product that did not offer a substantially different way of fulfilling demand. United States v. Falstaff Brewing Corp., 410 U.S. 526 (1973). Similarly, in United States v. Marine Bancorporation, the case involved an acquisition by National Bank of Commerce, a large national bank headquartered in Seattle, of Washington Trust Bank, a local bank operating in Spokane. Again, the question here concerned two companies that filled demand in substantially the same way. Neither bank offered an innovative new way to provide consumers with banking services. They simply operated in different geographies. United States v. Marine Bancorporation, 418 U.S. 602 (1974).

^13. United States v. Microsoft Corp., 253 F.3d 34, 53—54 (D.C. Cir. 2001) (en banc) (per curiam) (describing "middleware technologies that threatened to become viable substitutes for Windows").

^14. It is important to note that the competitive threat does not have to come the from the nascent competitor’s current product, service, or business model. It is acceptable for the threat to come from a potential expansion or re-positioning that will then compete with the incumbent in some way. For example, although Instagram was not seen as a direct competitor with Facebook at the time of acquisition. The FTC saw Facebook as a social network and Instagram as a photo-sharing app. However, Instagram’s expected ad-based business model made the two companies’ competitors from the perspective of their revenue models.

^15. For example, the iPhone, while not a direct competitor to Kodak per se, fills a consumer’s need for what in the past would have been a camera purchased from Kodak.

^16. W. Chan Kim & Renée Mauborgne, Nondisruptive Creation: Rethinking Innovation and Growth, MIT Sloan Mgmt. Rev. (Spring 2019).

^17. Id.; see also Israel Kirzener, Competition and Entrepreneurship (1973).

^18. Id. at 7-9.

^19. For example, Acorns, a FinTech company specializing in micro-investing and robo-advising, may never steal certain segments of consumers from incumbents such as Fidelity and TD Ameritrade, but it still provides a nascent competitive threat due to its innovative way of helping consumers invest in exchange traded funds.

^20. Chan Kim & Renée Mauborgne, supra note 16.

^21. Id.

^22. This is not to say an acquisition of a category three innovator cannot harm competition, but rather that its assessment would not fall under the nascent competitor theory. Such an acquisition could,

however, raise concerns under a conglomerate theory.

^23. Colleen Cunningham, Florian Ederer & Song Ma, Killer Acquisitions (March 22, 2019), available at https://ssrn.com/abstract=3241707.

^24. Id. at 1.

^25. Id. at 41.

^26. Elena Argentesi, Paolo Buccirossi, Emilio Calvano, Tomaso Duso, Alessia Marrazzo, & Salvatore Nava, Tech-over: Mergers and merger policy in digital markets, VoxEU (March 4, 2020), available at https://voxeu.org/article/mergers-and-merger-policy-digital-markets; see also, Meegan Hollywood & Adam Mendel, INSIGHT: Did Antitrust Enforcers Allow for Creation of Competitive Ecosystem Now Drawing Their Ire?, Bloomberg (March 31, 2020), available at https://news.bloomberglaw.com/mergers-and-antitrust/insight-did-antitrust-enforcers-allow-for-creation-of-competitive-ecosystem-now-drawing-their-ire.

^27. Cristina Caffarra, Gregory S. Crawford & Tommaso Valletti, "How Tech Rolls": Potential Competition And "Reverse" Killer Acquisitions, CPI Antitrust Chron. (May 2020).

^28. Id.

^29. Id.

^30. Id.

^31. Sai Krishna Kamepalli, Raghuram Rajan & Luigi Zingales, Kill Zone, NBER Working Paper No.27146 (May 2020).

^32. Id. at 1.

^33. Jay Shambaugh et al., The State of Competition and Dynamism: Facts About Concentration, Start-Ups, and Related Policies, Brookings Inst. (June 13, 2018), available at https://www.brookings.edu/research/the-state-of-competition-anddynamism-facts-about-concentration-start-ups-and-related-policies/.

^34. Id.

^35. Id. at 19-24.

^36. See Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1 (1984); but see Lina M. Khan, Note, Amazon’s Antitrust Paradox, 126 YALe L.J. 710, 716 (2017).

^37. See Stigler Report, supra note 4.

^38. Id. at 111 n.221.

^39. John Kwoka, Reviving Merger Control: A Comprehensive Plan for Reforming Policy and Practice (Oct. 9, 2018), available at https://www.antitrustinstitute.org/wp-content/uploads/2018/10/Kwoka-Reviving-Merger-Control-October-2018.pdf.

^40. See, e.g., Esteban Rossi-Hansberg, Pierre-Daniel Sarte & Nicholas Trachter, Diverging Trends in National and Local Concentration, in 35 NBER MACRoecoNOMics Annual 2020 (Martin Eichenbaum & Erik Hurst eds., forthcoming 2020); see also Chang-Tai Hsieh & Esteban Rossi-Hansberg, The Industrial Revolution in Services (Working Paper Mar. 17, 2020).

^41. Lemley & McCreary, supra note 4.

^42. Spencer Parts, Wu: Market share caps would improve enforcement, Global Competition Review (July 13, 2020), available at https://globalcompetitionreview.com/article/usa/1228842/wu-market-share-caps-would-improve-enforcement.

^43. Elizabeth Warren, Here’s How We Can Break Up Big Tech (May 8, 2019), available at https://medium.com/@teamwarren/heres-how-we-can-break-up-big-tech-9ad9e0da324c.

^44. Consolidation Prevention and Competition Promotion Act of 2019, S. 307, 116th Cong. (2019).

^45. See United States v. Baker Hughes, Inc., 908 F.2d 981 (D.C. Cir. 1990).

^46. Id.

^47. Klobuchar Introduces Legislation to Deter Anticompetitive Abuses, Klobuchar.Senate.Gov (Mar. 10, 2020), available at https://www.klobuchar.senate.gov/public/index.cfm/news-releases?ID=E59886E1-12EE-48A5-94F5-044658A75513.

^48. Does America Have a Monopoly Problem? Examining Concentration and Competition in the U.S. Economy, before the United States Senate Committee on the Judiciary (March 5, 2019) (testimony of Joshua D. Wright), available at https://www.judiciary.senate.gov/imo/media/doc/Wright%20Testimony.pdf.

^49. There is a growing debate on the differences between platforms and alleged aggregators. While we do not have space here to elaborate in great detail, an aggregator is in fact a platform. Alleged aggregators may have different technical architectures and firm structure than what are traditionally perceived as platforms, but they are still nonetheless platforms that facilitate the interaction of distinct groups of users.

^50. Annabelle Gawer, Bridging Differing Perspectives on Technological Platforms: Toward an Integrative Framework, 43 Research Policy 7, 1239-1249 (2014), available at http://www.sciencedirect.com/science/article/pii/S0048733314000456: See Geoffrey Parker & Marshall Van Alstyne, Two-Sided Network Effect: A Theory of Information Product Design, 51 Management Science 10 (2005); Mark Armstrong, Competition in Two-Sided Markets, 37 Rand J. Econ. 668 (2006) (defines two-sided markets as "markets involving two groups of agents interacting via ‘platforms’ where one group’s benefit from joining a platform depends on the size of the other group that joins the platform"); see also Michael A. Cusumano, Annabelle Gawer and David B. Yoffie, The Business of Platforms: Strategy in the Age of Digital Competition, Innovation, and Power (2019).

^51. Components and complements are used here synonymously.

^52. See Carl Shapiro & Hal R. Varian, Information Rules: A Strategic Guide To The Network Economy 13 (1999).

^53. Nicholas Economides, The Economics of Networks, Int’.l J. of Industr. Org. 14, 673-699 (1996) ("We have pointed out earlier that the crucial relationship in both one-way and two-way networks is the complementarity between the pieces of the network.").

^54. Michael L. Katz and Carl Shapiro, Systems Competition and Network Effects, 8 J. Econ Persp. 93 (Spring 1994).

^55. Id. ("In markets with network effects, there is natural tendency toward de facto standardization, which means everyone using the same system. Because of the strong positive-feedback elements, systems markets are especially prone to "tipping," which is the tendency of one system to pull away from its rivals in popularity once it has gained an initial edge."); Thomas Eisenmann, Geoffrey Parker & Marshall Van Alstyne, Strategies for two-sided markets, Harvard Business Review (2006).

^56. See Gawer, supra note 50.

^57. Christopher Yoo, Modularity Theory and Internet Regulation, 2016 U. Ill. L. Rev. 1 (2016).

^58. Id. at 8 ("Near decomposition of complex systems yields a number of advantages. As an initial matter, it makes complex systems easier to describe and comprehend. By creating a larger number of intermediate forms that can constitute building blocks for the larger system, near decomposition permits experimentation to occur on a smaller scale instead of with the system as a whole. The existence of stable intermediate forms also allows complex systems to evolve more rapidly.").

^59. Id.

^60. Id.

^61. See F.A. Hayek, The Use of Knowledge in Society, 35 Am. Econ. Rev. 519 (1945).

^62. See Gawer, supra note 50.

^63. Joseph Farrell & Garth Saloner, Standardization, Compatibility, and Innovation, 16 RAND J. Econ. 70 (1985) ("finding that a firm may remain incompatible with a rival because it will suffer a substantial decline in market share if it becomes compatible, since that would increase the value to consumers of its rival’s product."); see also Chun-Hui Miao, Limiting compatibility in two-sided markets. 8 Rev. of Network Econ. 4 (2009).

^64. Juan D. Carrillo & Guofu Tan, Platform Competition: The Role of Multi-homing and Complementors, Working Papers 06-30, NET Institute, revised Oct 2006 (finding that a platform and its complementors always benefit from an increase in the number of compatible complementors); See also Josh Lerner & Jean Tirole, Some Simple Economics of Open Source, 50 J. Indust. Econ. (2003).

^65. See Chun-Hui Miao, Limiting compatibility in two-sided markets. 8 Rev. of Network Econ. 4 (2009).

^66. See Jan Rybnicek (@jmrybnicek), Twitter (March 6, 2020, at 9:58 a.m.), available at https://twitter.com/jmrybnicek/status/1235942809921818625.

^67. See, e.g., Timothy J. Muris, Improving the Economic Foundations of Competition Policy, 12 Geo. Mason L. Rev. 1, 9-10 (2003) ("[A]lthough some industries appeared to have market structures favorable for the existence and exercise of substantial market power, the industries were, nonetheless, quite competitive.").

^68. Does America Have a Monopoly Problem? Examining Concentration and Competition in the U.S. Economy, before the United States Senate Committee on the Judiciary (March 5, 2019) (testimony of Joshua D. Wright), available at https://www.judiciary.senate.gov/imo/media/doc/Wright%20Testimony.pdf.

^69. David Autor, David Dorn, Lawrence Katz, Christina Patterson, & John Van Reenen, The Fall of the Labor Share and the Rise of Superstar Firms (forthcoming Quarterly Journal of Economics), available at https://scholar.harvard.edu/files/lkatz/files/adkpv-superstars-qje-manuscript-accepted-20191028.pdf; see also Sam Peltzman, Productivity and Prices in Manufacturing During an Era of Rising Concentration (2018), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3168877.47.

^70. See Jan Rybnicek (@jmrybnicek), Twitter (February 22, 2020, at 2:38 p.m.), available at https://twitter.com/jmrybnicek/status/1231302272048648192.

^71. Id.

^72. Cunningham et al., supra note 23, at 1.

^73. Id.

^74. But see Ilene Gotts & Richard Rapp, Antitrust Treatment of Mergers Involving Future Goods, Antitrust (Fall 2004). Gotts and Rapp track a dozen pharmaceutical cases where mergers were blocked and find varying outcomes in getting viable products to market.

^75. Marc Bourreau & Alexandre de Streel, Digital Conglomerates and EU Competition Policy (March 2019) ("A conglomerate merger generates consumption synergies when the consumers buy the two independent products from the merged entity, due to the benefits of one-stop shopping.").

^76. Jonathan Jacobson & Christopher Mufarrige, Acquisitions of "Nascent" Competitors, Antitrust Source (August 2020), https://www.americanbar.org/content/dam/aba/publishing/antitrust_source/2020/august-2020/aug20_jacobson_8_18f.pdf.

^77. Jian Jia, Ginger, Zhe Jin & Liad Wagman, The Short-Run Effects of GDPR on Technology Venture Investment, (May 22, 2020), ("the negative effects manifest in the number of and amounts raised in financing deals, and are particularly pronounced for newer, data-related, and business-to-consumer ventures.") available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3278912.

^78. See Laura Entis, Where Startup Funding Really Comes From, Entrepreneur (Nov. 20, 2013), available at https://www.entrepreneur.com/article/230011.

^79. Gordon M. Phillips and Alexei Zhdanov, R&D and the Incentives from Merger and Acquisition Activity, Rev. of Financial Studies 26, 34-78 (2012) ("Our model shows that small firms optimally may decide to innovate more when they can sell out to larger firms.").

^80. An adequate return varies depending on the particular circumstances, but regardless of what is adequate, the riskier the project, the higher the required return on that investment. See Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Chapter 4: The Basics of Risk (3d ed. 2012).

^81. Hal Varian, Recent Trends in Concentration, Competition, and Entry, 82 Antitrust L.J. 807, 820 (2019) ("implying that there were about twice as many successful acquisitions as IPOs.").

^82. See Brian J. Bushee & Gregory S. Miller, Investor Relations, Firm Visibility, and Investor Following, 87 Acct. Rev. 867, 870—71 (2012) (demonstrating that listed company fees, yearly disclosures, and compliance, as well as the IPO process itself, is costly.).

^83. Harry J. Sapienza et al., The Self-Determination Motive and Entrepreneurs’ Choice of Financing in Cognitive Approaches To Entrepreneurship Research 105, 106 (Jerome A. Katz & Dean A. Shepherd eds., 2003) ("[W]ealth maximization and self-determination are the two primary motives driving entrepreneurial financing choices."); D. Gordon Smith, The Exit Structure of Venture Capital, 53 UCLA L. Rev. 315, 316 (2005) ("Before venture capitalists invest, they plan for exit. That is, they plan to withdraw their investment, adjusted for any return, from the entrepreneur’s company. The ability to control exit is crucial to the venture capitalist’s business model of short-term funding of nascent business opportunities.").

^84. Cunningham et al., supra note 23, at 40.

^85. Gordon Phillips & Alexei Zhdanov, Venture Capital Investments and Merger and Acquisition Activity around the World, NBER Working Paper No. 24082 ("We argue that active M&A markets promote innovation investments and make it easier for venture capitalists to monetize their investment by selling their portfolio companies to potential acquirers.").

^86. See Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Chapter 22: Valuing Young or Start-Up Firms (3d ed. 2012).

^87. U.S. Dep’t. of Justice & Fed. Trade Comm’n., Horizontal Merger Guidelines § 6.4 (2010) [hereinafter HMG], available at https://www.justice.gov/atr/horizontal-merger-guidelines-08192010 [https://perma.cc/CQ5M-8PDD] (describing, as possible effects from a horizontal merger, a "reduced incentive to continue with an existing product-development effort or . . . to initiate development of new products").

^88. Id.

^89. See U.S. Dep’t of Justice & Fed. Trade Comm’n Vertical Merger Guidelines (2020) [hereinafter VMG], available at https://www.ftc.gov/system/files/documents/reports/us-department-justice-federal-trade-commission-vertical-merger-guidelines/vertical_merger_guidelines_6-30-20.pdf.

^90. Id. at 1.

^91. U.K. Merger Assessment Guidelines (CC 2 Revised), ¶¶ 5.6.1 and 5.6.2. The terminology in the Merger Assessment Guidelines refers to "conglomerate mergers of two suppliers of goods which do not lie within the same market, but which are nevertheless related in some way. . ."

^92. VMG at 7.

^93. Id. at 9.

^94. See, e.g., Public Comments of 26 State Attorneys General on Draft Vertical Merger Guidelines, available at https://coag.gov/app/uploads/2020/02/Final-AG-VMG-Comments-2.26.pdf.

^95. Joshua Karl Austin, Vertical Integration and Pricing Outcomes in Retail Gasoline Markets, 35 Econ. Bull. 1 (2015); James C. Cooper, et al., Vertical Antitrust Policy as a Problem of Inference, 23 INT’L J. INDUS. ORG. 639, 648 (2005); Daniel P. O’Brien, The Antitrust Treatment of Vertical Restraints: Beyond the Possibility Theorems, in The Pros And Cons Of Vertical Restraints 40, 76-81 (Konkurrensverket Swedish Competition Authority ed., 2008); Lawrence G. Goldberg, The Effect of Conglomerate Mergers on Competition, 16 J.L. & Econ. 1 (1973).

^96. Michael A. Cohen, A Study of Vertical Integration and Vertical Divestiture: The Case of Store Brand Milk Sourcing in Boston, 22 J. Econ. & Mgmt. Strategy 101 (2013); Laurence C. Baker, M. Kate Bundorf, & Daniel P. Kessler, Vertical Integration: Hospital Ownership of Physician Practices is Associated with Higher Prices and Spending, 33 Health Aff. 756 (2014); Thomas G. Koch, Brett W. Wendling, & Nathan E. Wilson, How Vertical Integration Affects the Quantity and Cost of Care for Medicare Beneficiaries, 52 J. Health Econ. 19 (2017).

^97. John M. Yun, Testimony on Competition in Digital Technology Markets: Examining Acquisitions of Nascent or Potential Competitors by Digital Platforms (September 24, 2019), available at https://papers.ssrn.com/ sol3/papers.cfm?abstract_id=3459660.