"Ecosystem" Theories and Digital Platform Mergers

This is part of our KS-Comp Update series brought to you from our Antitrust & Competition practice.

On October 25, 2022, Cristina Caffarra (Partner, co-Head of Keystone Europe) chaired a panel discussion titled A “Whack-a-mole monopolization machine”? “Ecosystem” theories in digital platform mergers. The panel included speakers from academia and from antitrust enforcers. Several key insights from the discussion are listed below, which will be of interest to practitioners, policymakers, academics, enforcers, and any others engaged in the antitrust aspects of mergers involving a digital platform. In particular, the event was instructive for the frank comments from enforcers (each of whom gave a disclaimer that their views were their own and not of their agencies) regarding the unique antitrust considerations raised by digital platform mergers.

Among the key insights from the discussion were the following:

• Multiple “levers” for anticompetitive effects. Several speakers commented on the variety of “levers” that digital platforms may be able to pull to generate anticompetitive effects, and relatedly, whether a court would be satisfied with a plaintiff identifying such levers without a more specific theory of harm. John Newman (Deputy Director, Bureau of Competition at the U.S. Federal Trade Commission) spoke about the existence of “plus factors” in evaluating a merger, such as the presence of network effects, data advantages, and whether the technology at issue is in flux.
• Efficiency offences. Multiple speakers referred to the concept of “efficiency offences”, which refers to conduct that produces short-term efficiencies but long-term competitive harm. Hans Zenger (Head of Unit, Chief Economist Team, DG Competition at the European Commission) stated that mergers in the tech industry have brought about “enormous efficiencies” but also cautioned that such efficiencies can be followed by conduct that denies entry points to rivals and results in a company gaining “impermeability” across different markets. Mike Walker (Chief Economic Adviser at the UK Competition and Markets Authority) noted that short-term efficiencies may be essential to a theory of harm.
• “Ecosystem” theories of harm. Many panelists referred to “ecosystem” theories of competitive harm, which center around the concept digital platforms as “ecosystems” – that is, digital platforms with a variety of different and interconnected lines of business. Annabelle Gawer (Universities of Surrey and Oxford) explained that one “ecosystem” theory of harm would be for the digital platform to choose one product to serve as a “bottleneck” and then to commoditize its products in other markets. Similarly, Patrick Rey (Toulouse School of Economics) spoke about the potential for conglomerates to reduce consumer choice and consumer surplus through pure bundling (that is, bundling goods without providing customers of purchasing the products separately) or technical integration.
• Acquirer’s choice of “build versus buy”. John Newman spoke about the possible revival of the “actual potential competition” theory. The theory suggests that “but for” a merger one of the merging parties would have entered the relevant market. He also spoke about the tendency for internal expansion to create more investment, more jobs, and greater output than acquisitions.
• Uneven importance of network effects. Feng Zhu (Harvard Business School) explained that networks effects are not equally strong across digital platforms. He discussed video game consoles as an example, noting that competition depends heavily on the existence of “hit” games available on the console, rather than the variety of games. He contrasted video game consoles with video streaming platforms, where consumers are more heavily influenced by the variety of videos on a platform.
• Complementary goods may become substitutes. Patrick Rey remarked that while traditional antitrust analysis involves drawing distinctions between substitutes and complements, the distinction is often unclear or fluid. For example, certain goods may begin as substitutes and change to complements (or vice versa) over time or in response to price changes, while others may be substitutes for one group of customers and complements for another.

The event was motivated by a recent speech by Jonathan Kanter (Assistant Attorney General of the Antitrust Division of the U.S. Department of Justice). In the speech, AAG Kanter compared antitrust enforcement of digital platforms to a game of whack-a-mole, which is unwinnable unless the player can “unplug” the whack-a-mole machine – and he identified one way to do so as scrutinizing more closely those mergers that do not fit strictly within horizontal or vertical categories. AAG Kanter stated that reliance on the horizontal and vertical distinction has “sometimes screened out important information about mergers that entrench market power or tend to create a monopoly” and cautioned that mergers can have anticompetitive effects without being strictly horizontal or vertical.

A link to a video of the event is available from CEPR here.

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If you have any questions about this post or about Keystone’s competition practice more generally, please contact Cristina Caffarra, Jennifer Redmond, Jim Robson, Nadia Shepard, or any other member of the Keystone team.

Keystone is an innovative strategy and economics consulting firm delivering transformative ideas to global brands, government bodies, and law firms. Keystone’s competition practice was recognized in the Global Competition Review’s most recent ranking of the world’s leading consultancies for antitrust economics. Keystone and Keystone experts contribute to and engage with thought leadership regarding the evolving fields of competition law and policy as they relate to technology businesses.

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