Cracking down on mergers would leave us all worse off

With Big Tech on the hot seat and some on Capitol Hill calling to break up the tech giants, Sen. Amy Klobuchar (D-Minn.) is pushing forward legislation that would effectively bar the biggest firms from using mergers to get any larger.

Klobuchar’s bill calls for heightened scrutiny of mergers where the acquiring company has more than $100 billion in assets, net revenues or market capitalization, as well as any deal valued at more than $5 billion. For such deals to go forward, the parties would have to demonstrate to a court that the combination would enhance competition, an inversion of the usual burden of proof.

While the senator has pitched her proposal as a way to crack down on allegedly anticompetitive concentration and so-called “killer acquisitions,” where dominant firms buy emerging competitors to shut down development of rival products or services, there is a serious risk the change would do more to harm competition than to help it.

Companies seek mergers for all sorts of reasons. Some may allow them to raise prices by reducing competition in their markets. Others lead to valuable synergies and cost savings that can be passed on to consumers. It’s the job of antitrust enforcers to sort the former from the latter. The Klobuchar bill, by contrast, effectively assumes that any acquisition by a large firm will harm competition. This is deeply mistaken.

“Horizontal” mergers are combinations between firms that do similar things in the same market, such as last year’s controversial merger of Sprint and T-Mobile. Allowing direct competitors to combine could make it easier for them to raise their prices. Alternatively, with fewer competitors forcing them to maintain standards of quality, their offerings to consumers might deteriorate.

But horizontal mergers can also be good for competition. When two former competitors merge, they may be able to cut costs and compete more effectively with other rivals. These economies of scale can also drive investment in research and development, improving innovation in the long run. The big questions for antitrust enforcers in these cases are how concentrated the market would be after the merger, and how easy it would be for new competitors to enter.

With “vertical” mergers between firms in separate markets, the potential benefits are even more clear-cut. Vertical mergers are very unlikely to increase market power that would harm consumers. Apple didn’t buy the weather app Dark Sky because of the threat it posed to Apple’s own Weather app, from which Apple makes no money. It did it so that Apple could integrate Dark Sky’s features and hire its product team to improve its own service.

These kinds of mergers are particularly common in tech, where every big company is trying to build an ecosystem of products to keep customers interested in their core, most profitable services. While it is possible that Big Tech firms could simply build these ecosystems themselves, the time and money that would take might leave consumers with worse and more expensive products.

There are numerous examples of vertical mergers that have boosted competition and improved products for consumers. In 2016, Walmart bought the e-commerce startup Jet.com. Since then, the company has used that acquisition to enhance its digital retail presence, with sales up 65 percent during the COVID pandemic. That was significantly faster than Amazon’s 39.1 percent growth over the same period, albeit from a much lower starting point. Walmart also has made acquisitions in digital advertising, where it will compete with Google and Facebook, and appears to be moving into banking. These can only be a good thing for competition.

Being acquired is also one of the main ways entrepreneurs and startup investors can make money from a new company. Empirical evidence suggests that more active markets for acquisitions are associated with more venture capital investment, while curbs on acquisitions reduce investment.

None of this is to say that mergers don’t ever stifle competition, but regulators already have tools to address those cases. Over the past two decades, the federal antitrust agencies have won nearly 85 percent of the merger challenges they have brought. They have undoubtedly deterred many more, both pro- and anticompetitive. Though witnesses at the Senate Judiciary Committee’s March 11 hearing suggested that many mergers have gone unchallenged, only one cited by critics of current antitrust law — Whirlpool’s merger with Maytag in 2006 — has actually shown signs of reduced competition since the deal.

Furthermore, many of the industries that critics highlight, like banking and pharmaceuticals, are highly regulated. Some, like airlines and brewing, have regulations that directly prevent new entry. There’s even an explicit antitrust exemption for insurance. It’s not surprising there would be antitrust problems in these markets, but that isn’t evidence of lax antitrust enforcement. Sen. Mike Lee (R-Utah) was right to point out at the Senate hearings that sometimes the biggest barrier to competition is government regulation.

Regulating mergers as if they are only ever bad for competition would mean missing out on the competitive benefits that mergers can bring. Changing the burden of proof to a “guilty until proven innocent” standard, as the Klobuchar bill would do, would increase this risk enormously.

Sam Bowman is Director of Competition Policy at the International Center for Law and Economics (ICLE), where he manages the Center’s work on competition and platform regulation issues in the U.S. and overseas.