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Potential Competition, Nascent Competitors, and Killer Acquisitions

John M. Yun

INTRODUCTION

Assessing the competitive impact of acquisitions is an integral part of antitrust

enforcement. In fact, there is probably no other area of antitrust enforcement that is as

well-developed and formalized as the review of mergers and acquisitions.

Recently,

however, there has been a great deal of attention given to a certain category of

acquisitions—namely, the acquisition of potential competitors and nascent competitive

threats.

Relatedly, there is a concern that, post-acquisition, the acquiring firm will

This chapter is based, in part, on written testimony provided on September 24, 2019, before the

Subcommittee on Antitrust, Competition Policy, and Consumer Rights of the U.S. Senate Committee on

the Judiciary for a hearing entitled, Competition in Digital Technology Markets: Examining Acquisitions

of Nascent or Potential Competitors by Digital Platforms. The testimony was reprinted as Potential

Competition and Nascent Competitors, 4 CRITERION J. ON INNOVATION 625 (2019). I thank Joshua Wright for

providing valuable comments and Scalia Law student Rachel Burke for excellent research assistance.

See, for example, U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER GUIDELINES (2010),

https://www.justice.gov/atr/horizontal-merger-guidelines-08192010 [hereinafter Horizontal Merger

Guidelines], which is based on a strong legacy of prior merger guidelines including major revisions in 1982

and 1992.

See, e.g., AUSTL. COMPETITION & CONSUMER COMM’N, DIGITAL PLATFORMS INQUIRY FINAL REPORT 10 (2019),

https://www.accc.gov.au/system/files/Digital%20platforms%20inquiry%20-%20final%20report.pdf

[hereinafter ACCC Report] (“. . . a range of factors contributed to each of Google’s and Facebook’s dominant

positions in their respective markets. The acquisition of potential competitors by the dominant firms and

economies of scope created via control of data sets are two such factors.”); DIRECTORATE-GENERAL FOR

COMPETITION, EUR. COMM’N, COMPETITION POLICY FOR THE DIGITAL ERA 111 (2019) [hereinafter Crémer

Report], https://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf (“Concerns may,

however, arise notably when such acquisitions result in a strengthening of dominance and thereby a

significant impediment of effective competition, e.g. by eliminating a competitive threat and/or by raising

barriers to entry for other (potential) competitors, thus further reducing the risk of attacks on a strongly

entrenched market position from the fringe.”); DIGITAL COMPETITION EXPERT PANEL, UNLOCKING DIGITAL

COMPETITION (2019) [hereinafter Furman Report], https://assets.publishing.service.gov.uk/government

/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_w

eb.pdf (“. . . digital mergers are also more likely to involve theories of harm which relate to elimination of

potential competitors or harming innovation.”); STIGLER CTR., STIGLER COMM. ON DIGITAL PLATFORMS,

FINAL REPORT 111 (2019) [hereinafter Stigler Report], https://research.chicagobooth.edu/-

/media/research/stigler/pdfs/digital-platforms---committee-report---stigler-center.pdf (“The behavior that

may be of greatest concern to the many policymakers studying powerful digital businesses is their

Electronic copy available at: https://ssrn.com/abstract=3733716

Yun – Potential Competition, Nascent Competitors, and Killer Acquisitions

653

terminate the competing, or potentially competing, acquired product, in what is labeled

a “killer acquisition.”

Notably, the term “killer acquisition” is also used to refer, more

generally, to the suppression of potential competition—whether the acquired product is

discontinued or not.

These concerns have raised questions about whether anticompetitive acquisitions

are occurring in areas outside the view of “standard” merger analysis—that is, in markets

where an upstart has developed, or will soon develop, a competitive innovation and

product that will challenge the incumbent’s primacy. Yet, there is also a recognition that

there is a great deal of uncertainty associated with this theory of harm, which can result

in higher overall error costs. Recently, various policy proposals have been offered to

specifically address this theory that powerful incumbents are acquiring potential and

nascent competitors. These proposals range from developing new evidentiary standards

under Section 7 of the Clayton Act to imposing ex ante regulatory prohibitions against

certain types of acquisitions.

In this chapter, we address a number of critical questions. Is there a problem with

large technology firms, or platforms, purchasing nascent competitors and suppressing

competition before they can mature into vibrant competitors? Further, if there is a

acquisition of potential competitors.”).

See, e.g., ACCC Report, supra note 2, at 75 (“The acquisition by an incumbent firm of smaller innovative

companies (often active in closely connected markets), discontinuing the target’s innovative projects and

eliminating potential future rivals has been referred to as part of a so-called ‘killer acquisition strategy’.”).

See David Pérez de Lamo, Assessing “Killer Acquisitions”: An Assets and Capabilities-Based View of the Start-

Up, CPI ANTITRUST CHRON., May 2020, at 50, 51 (“Subsequent conferences employed the term in a general

way to include all acquisitions of promising companies by incumbent firms with the objective of

suppressing potential competition, regardless of whether the target company and its innovative project

were terminated post-transaction.”).

See infra Section III for a fuller discussion of various proposals. In one prominent proposal, Senator Amy

Klobuchar (D-MN) introduced a bill that would ban significant acquisitions by any company with a market

capitalization higher than $100 billion unless the acquirer could demonstrate that the transaction would

not lessen competition by more than a de minimis amount. See Consolidation Prevention and Competition

Promotion Act of 2017, S. 1812, 115th Cong. § 3(3)(B)(ii) (2017).

Electronic copy available at: https://ssrn.com/abstract=3733716

The GAI Report on the Digital Economy

654

problem, are the current antitrust laws and the enforcement of those laws sufficient to

combat the problem? If not, is there a legislative solution? In addressing these questions,

we offer a clear delineation and classification scheme to differentiate potential

competition, nascent competitors, and killer acquisitions. Ultimately, while classification

schemes are helpful, the assessment of all horizontal acquisitions, whether the rivalry is

currently happening or will happen in the future, comes down to the core analytical

considerations involving competitive effects, entry, and efficiencies.

I. CLASSIFICATION

Who are “nascent” and “potential competitors”? While these two terms are often,

and increasingly, used synonymously, they have traditionally referred to two different

concepts. The term “potential competitor” has a longer history and is typically defined

as a firm that is likely to have a product that will compete at some point in the future or

could easily enter if current market conditions change (such as a non-cost based increase

in price).

Potential competition can describe a number of similar but slightly different

scenarios. First, the acquiring firm could be a current market participant and the acquired

firm could be a potential market participant. Second, the acquiring firm could be a

potential market participant while the acquired firm is a current market participant.

There is also a distinction between “perceived potential competition” and “actual

potential competition.”

Perceived potential competition refers to a reduction in current

competition due to the acquisition of a competitor, who is not an active producer, but the

The potential competition doctrine first emerged in United States v. El Paso Natural Gas Co., 376 U.S. 651

(1964). See generally William E. Dorigan, The Potential Competition Doctrine: The Justice Department’s Antitrust

Weapon Under Section 7 of the Clayton Act, 8 J. MARSHALL J. PRAC. & PROC. 415, 418 (1975) (citing, inter alia, El

Paso Natural Gas in an exposition of the potential competition doctrine).

See, e.g., Gregory J. Werden & Kristen C. Limarzi, Forward-Looking Merger Analysis and the Superfluous

Potential Competition Doctrine, 77 ANTITRUST L.J. 109, 111 (2010). Werden & Limarzi find little value in the

use of these labels. Id. at 112 (“What follows describes horizontal merger analysis in detail with little use of

the labels ‘actual’ or ‘potential’ and no use of the labels ‘actual potential’ or ‘perceived potential’

competition.”).

Electronic copy available at: https://ssrn.com/abstract=3733716

Yun – Potential Competition, Nascent Competitors, and Killer Acquisitions

655

threat of entry disciplines the current market. In contrast, an actual potential competitor

is a firm that impacts future competition from future entry.

“Nascent competitor,” however, is term that is relatively new in antitrust

jurisprudence and was largely developed in the late 1990s with the Department of

Justice’s (DOJ’s) Microsoft case.

It is a term that typically refers to a supplier with an

existing product or technology, whether inside or outside some relevant product market,

that could, at some point, be considered a significant competitor, or be developed into a

significant competitor.

Generally speaking, we can consider potential competition as a product that does

not yet compete within a specific relevant market but is predicted to compete or could

compete very quickly; thus, the potential competition theory is really a forecast about

pending entry or the threat of entry.

Whereas, nascent competition describes rivalry or

potential rivalry with a product or technology—particularly one associated with a great

deal of innovation—that exists but has not yet matured into a significant competitor

whether within or outside the same relevant market. Like potential competition, nascent

competition can be a forecast of entry, but it involves a number of other aspects. In

particular, it also involves a forecast of future differentiation or development of a product

or technology and its level of market success.

In United States v. Microsoft Corp., the U.S. Court of Appeals for the District of Columbia Circuit stated:

“We may infer causation when exclusionary conduct is aimed at producers of nascent competitive

technologies as well as when it is aimed at producers of established substitutes. Admittedly, in the former

case there is added uncertainty, inasmuch as nascent threats are merely potential substitutes.” 253 F.3d 34,

79 (D.C. Cir. 2001). For an overview of the court’s treatment of nascent competition in Microsoft, see Douglas

H. Ginsburg & Koren W. Wong-Ervin, Challenging Consummated Mergers Under Section 2, CPI NORTH

AMERICA COLUMN, May 2020, at 2–4.

“Relevant product markets” are defined as the smallest group of products that would allow a hypothetical

monopolist to raise price a small, but significant, and nontransitory amount (that is, the SSNIP test or the

hypothetical monopolist test). See Horizontal Merger Guidelines § 4.

An example would be an out-of-state producer of an established product who is poised to enter the state

market but is acquired by an established in-state producer. In other words, potential competition naturally

fits scenarios involving geographic market entry.

Electronic copy available at: https://ssrn.com/abstract=3733716

The GAI Report on the Digital Economy

656

Finally, a related concept is a “killer acquisition,” which is the idea that a firm

acquires another firm to “eliminate potentially promising, yet likely competing,

innovation.”

It is a term that is effectively capturing the idea of an anticompetitive

acquisition of a potential or nascent competitor where the primary intent is to stop a

product’s development without an offsetting efficiency rationale.

The term, however, is

also used, more generically, to refer to the suppression of future competition—regardless

of whether the product is actually “killed.”

Whenever a firm, big or small, acquires another firm or set of assets, there are an

infinite number of possible post-merger outcomes, but we can broadly categorize them

as: (1) those that are good for consumers, (2) those that have no real impact on consumers,

and (3) those that are bad for consumers. How do we measure “good” or “bad” in the

realm of antitrust? We base it on the consumer welfare standard.

As a consequence, we

do not base antitrust assessments of “good” or “bad” acquisitions on how well

competitors are predicted to perform post-merger. Moreover, we do not base welfare

considerations on exactly who is providing the surplus. For instance, whether four

equally sized firms or two leading firms with a handful of smaller rivals are providing

the surplus, we assess the performance of the market from the perspective of consumers.

Colleen Cunningham et al., Killer Acquisitions 1 (Apr. 19, 2020) (unpublished manuscript),

https://ssrn.com/abstract=3241707.

See, e.g., Benoit D’Udekem et al., Remember Stacker? Another Look at “Killer” Acquisitions in the Digital

Economy, CPI ANTITRUST CHRON., May 2020, at 38, 39 (offering an example of a killer acquisition: a hard

drive manufacturer’s purchase of a software product that doubled the capacity of hard drives with the sole

purpose of preventing its availability on the market).

See Pérez de Lamo, supra note 4.

For a full description of the consumer welfare standard, see, for example, Gregory J. Werden, Cross-Market

Balancing of Competitive Effects: What Is the Law, and What Should It Be?, 43 J. CORP. L. 119, 139 (2017); Joshua

D. Wright et al., Requiem for a Paradox: The Dubious Rise and Inevitable Fall of Hipster Antitrust, 51 ARIZ. ST.

L.J. 293, 296 (2019).

See, e.g., Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1, 2 (1984) (“Does it matter whether

there are two oil companies or twenty? 200 stations or 20,000? Is a Herfindahl-Hirschman Index of

concentration in titanium dioxide of 3000 too high? Too low? Just right? If the court tries to move the

Electronic copy available at: https://ssrn.com/abstract=3733716

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