
By: Chris Pike (OECD On The Level)
Start-ups play a vital role in competitive markets. They are a key source of new ideas and products, disruptive innovation and maverick business models. They help break up concentrated markets, force less efficient incumbents to improve or exit, and thus help deliver competitive markets that increase efficiency and reduce inequality. They are also particularly vulnerable both to exclusionary unilateral conduct and to the distortionary effects of rent-seeking by incumbents who may lobby for subsidies, anticompetitive regulation, or trade protection. Competition agencies are therefore often keen to ensure that start-ups enjoy a level playing field and the opportunity to compete on the merits without the threat of exclusionary behaviour from dominant incumbents. However, their relevance to merger control is often limited to their role as a potential new entrant, whose presence might allow agencies to clear otherwise worrying merger transactions.
This all changed in 2018 when researchers identified that large incumbents in pharmaceutical markets were acquiring start-ups, but not adopting and developing the acquired product, as had been assumed, but instead neglecting and discontinuing the development of the product. These were labelled ‘killer acquisitions’ and it soon became clear that these were quite carefully organised to keep them off the radar of enforcers. In the wake of these revelations, it was quickly identified that thousands of start-up acquisitions were also taking place in markets involving digital platforms, and that like the pharmaceutical cases these were rarely ever examined in depth by competition agencies. However, in some of the most controversial cases the concern was not a straight killer acquisition theory of harm. Instead, the concern was perhaps better described as a reverse killer acquisitions theory of harm (since it was the incumbent’s product who’s development was shutdown or mothballed), or simply as a loss of potential competition that reduced the value of the product offered, rather than killing it off.
As the OECD’s report on Start-ups, killer acquisitions and merger control sets out, some agencies used the flexibility of their merger review system to immediately increase their examining of such acquisitions (e.g. using ex-post assessment when allowed in their legal system or share-based thresholds), while others moved to change notification processes to plug the gap (for example Germany and Austria). Certainly, some agencies have always scrutinised start-up acquisitions that meet the relevant thresholds, particularly in highly regulated pharmaceutical markets where agencies have been able to use the regulatory approvals process to gain confidence in their ability to identify uncertain harms. For example, Oldale, Sayyed & Sweeting, (forthcoming) note that the US FTC challenged 81 mergers on potential competition grounds over 25 years. However, without the comfort provided by such structured product pipelines, many have been reluctant to take any action in the face of the uncertainty that is endemic in cases involving a loss of potential competition…
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