Over the last several years, there has been a growing focus on the size and scope of major digital tech platforms such as Amazon, Facebook, Apple, and Google. Dissatisfied with a perceived lack aggressive antitrust enforcement which condoned the mergers and acquisitions that contributed to such growth, politicians on both sides of the aisle are considering legislation to constrain these firms’ ability to engage in any future acquisitions.
For example, last summer the House Judiciary Committee voted out the “Platform Competition and Opportunity Act,” and Senator Amy Klobuchar and Senator Tom Cotton recently introduced a companion piece in the Senate. (S. 3197).
Under both bills, any acquisition by a large technology company (i.e., a “covered platform operator”) of the stock or assets of any other “person engaged in commerce or in any activity or affecting commerce” would be prohibited unless the acquiring platform “demonstrates by clear and convincing evidence” that the target company either does not compete directly with the covered platform for any product or service or at, minimum, the target company only poses a “nascent or potential” competitive threat. As the draft bills concede, not only are the goals of such draconian restrictions to prevent large tech platforms from either “enhanc[ing]” or “increas[ing]” their market position, but also to prevent these companies from even “maintain[ing]” their current market position. Needless to say, such a radical approach marks a significant departure from current antitrust law and jurisprudence.
But while these bills might make for good populist fodder in today’s highly political environment, it appears that little attention has been paid to the potential unintended consequences that could result should this proposed legislation ever to become law. Firms are not passive recipients of regulation, and they will alter their behavior within the boundaries of the law to avoid regulatory intent. As such, this legislation does not bode well for America’s innovation economy.
A recent economic study highlights some of these concerns. Among other findings, the analysis found that statutory restrictions like those proposed in the “antitrust reform” bills on acquisitions by the large platforms will adversely affect investments in innovations and alter the innovator-investor exit strategy, incentivizing innovators to transfer their innovations to dominant firms in even earlier stages to avoid antitrust scrutiny. In fact, these statutory prohibitions may encourage innovators to choose this early exit strategy despite it being inefficient. Such prohibitions also will drive innovation to go in-house at big firms and reduce external, independent innovation. More importantly, these prohibitions on later-stage acquisitions will reduce the returns to innovation, thus slowing technological advancement across the industry.
Exit by sale is a primary means by which investors in technology make a profit, and many innovations are developed specifically with the hope of selling out to well-established firms due to the profits provided by positive network external effects. Raising barriers to the acquisition of burgeoning tech firms by established platforms may simply lead to the sale of technology in very early stages to avoid antitrust scrutiny, increasing in-house development and reducing innovation by small firms.
Both the House and Senate versions of the Platform Competition and Opportunity Act will certainly reduce the amount of independent innovation in the technology space—an unintended consequence—but could also ultimately reduce competition, directly undermining the intended consequence of the legislation. Accordingly, so long as the goal of antitrust remains the maximization of consumer welfare, these bills certainly are a step in the wrong direction.
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