NASCENT COMPETITORS.

AuthorHemphill, C. Scott
PositionSymposium: The Post-Chicago Antitrust Revolution

INTRODUCTION 1880 I.WHAT IS A NASCENT COMPETITOR? 1883 A.Examples 1883 B.Significance and Definition 1886 II.PROTECTING NASCENT COMPETITION 1889 A.Overall Approach 1889 B.Section 7 of the Clayton Act 1893 C.Section 2 of the Sherman Act 1896 III.IDENTIFYING ANTICOMPETITIVE ACQUISITIONS 1902 A.Evidence of an Anticompetitive Plan 1903 B.Later-Acquired Evidence 1905 CONCLUSION 1909 INTRODUCTION

A nascent competitor is a firm whose prospective innovation represents a serious future threat to an incumbent. The firm's potency as a competitor is as yet not fully developed and hence unproven. For example, a new, fast-growing, and evolving online platform is a nascent competitor to the currently dominant platform. A promising but unproven cure for a disease represents nascent competition for an incumbent selling a therapy that is the current standard of care.

Nascent rivals play an important role in both the competitive process and the process of innovation. (1) New firms with new technologies can challenge and even displace existing firms; sometimes, innovation by an unproven outsider is the only way to introduce new competition to an entrenched incumbent. That makes the treatment of nascent competitors core to the goals of the antitrust laws. As the D.C. Circuit has explained, "it would be inimical to the purpose of the Sherman Act to allow monopolists free rei[]n to squash nascent, albeit unproven, competitors at will...." (2)

Government enforcers have expressed interest in protecting nascent competition, particularly in the context of acquisitions made by leading online platforms. (3) However, enforcers face a dilemma. While nascent competitors often pose a uniquely potent threat to an entrenched incumbent, the firm's eventual significance is uncertain, given the environment of rapid technological change in which such threats tend to arise. That uncertainty, along with a lack of present, direct competition, may make enforcers and courts hesitant or unwilling to prevent an incumbent from acquiring or excluding a nascent threat. A hesitant enforcer might insist on strong proof that the competitor, if left alone, probably would have grown into a full-fledged rival, yet in so doing, neglect an important category of anticompetitive behavior.

In this Article, we identify nascent competition as a distinct analytical category and outline a program of antitrust enforcement to protect it. Nascent competition means different things to different people. Our approach emphasizes prospective innovation by a future direct competitor. We consider both exclusionary conduct and acquisitions, with a particular focus on the latter. We confine ourselves to liability and bracket questions of remedy.

We favor an enforcement policy that prohibits anticompetitive conduct that is reasonably capable of contributing significantly to the maintenance of the incumbent's market power. (4) That approach implies enforcement even where the competitive significance of the nascent competitor is uncertain. Uncertainty is a ground for caution, but we argue that the overall balance favors a bias to action, given the importance of the innovation at issue and resulting costs of underenforcement. The proper approach does not require proving, as some have argued, that successful competitive entry in the "but-for" world by the excluded innovator would necessarily or probably have occurred. Such a standard is not compelled by the relevant case law and serves no clear policy related to the goals of antitrust. Instead, it would lead the law to miss out on obvious efforts to destroy competition, and also create a perverse incentive for threatened incumbents to accelerate their anticompetitive programs. (5)

The acquisition of a nascent competitor raises several particularly challenging questions of policy and doctrine. First, acquisition can serve as an important exit for investors in a small company, and thereby attract capital necessary for innovation. Blocking or deterring too many acquisitions would be undesirable. However, the significance of this concern should not be exaggerated, for our proposed approach is very far from a general ban on the acquisition of unproven companies. We would discourage, at most, acquisition by the firm or firms most threatened by a nascent rival. Profitable acquisitions by others would be left alone, as would the acquisition of merely complementary or other nonthreatening firms. While wary of the potential for overenforcement, we believe that scrutiny of the most troubling acquisitions of unproven firms must be a key ingredient of a competition enforcement agenda that takes innovation seriously.

Second, as a matter of enforcement practice, the question of how to distinguish harmful from harmless acquisitions is important and sometimes difficult. Many acquisitions have important procompetitive justifications or are harmless overall. A small, unproven firm might be acquired in order to acquire expertise, to add a specific technical capability, or to make a bet on a "moon shot"--a risky, unproven technology in another market. Identifying anticompetitive conduct is a familiar and pervasive problem in antitrust enforcement, but it is heightened by the uncertainties associated with innovation and technological change.

We think evidence of an anticompetitive plan is a particularly important guide in this area. (6) Such intent might be subjectively expressed through testimony or internal writings. The enforcer or factfinder essentially borrows a party's expertise to help form a judgment about competitive effects. Alternatively, intent might be revealed through conduct, such as paying too much for a rival (unless the anticompetitive benefits are taken into account) or a broader pattern of buying nascent competitors.

Third, uncertainty and product evolution also influence the timing of antitrust intervention, whether for exclusionary conduct or acquisitions. (7) Where nascent competitors are concerned, agencies can intervene early--before an acquisition closes or, in an exclusion case, when evidence of exclusion first surfaces. Given the inherent informational limits when it comes to nascent competitors, however, it can sometimes be better to wait. (8) At a minimum, the passage of time should not be disqualifying.

Waiting often permits enforcers to acquire critical information that is unavailable at an earlier period. Enforcers can uncover the true intent of the conduct, as hidden information comes to light or (more prosaically) as multiple bad acts gradually fill in an overall picture. They may also learn about the adverse effect of the conduct, including the plausible potency of the nascent competitor and the durable market power of the incumbent. Making use of such new information does not indulge in unwarranted hindsight bias. These benefits often offset the costs of waiting, including the disruption associated with some ex post remedies. Our emphasis on stronger ex post enforcement offers an alternative to recent proposals emphasizing the need for new ex ante regulation. (9)

This Article proceeds in three parts. Part I defines what we mean by nascent competitors and provides paradigmatic examples. Part II sets out and defends our overall approach to protecting nascent competition and analyzes its fit with existing antitrust law. Section 7 of the Clayton Act, which prohibits certain anticompetitive acquisitions, is a particularly useful tool where the nascent competitor already has a presence in the incumbent's market. We argue that Section 2 of the Sherman Act is also an effective enforcement tool in the context of incumbents with monopoly power. Here, the D.C. Circuit's opinion in United States v. Microsoft provides a helpful framework. Part III assesses several types of evidence that are important components of an antitrust enforcement program aimed at protecting nascent competition from anticompetitive acquisitions.

  1. WHAT IS A NASCENT COMPETITOR?

    As we use the term, a nascent competitor is a firm whose innovation represents a serious, albeit not completely certain, future threat to an incumbent. We begin by presenting several real-world examples of nascent competition, then turn to an explication of the key features of our definition.

    1. Examples

      Operating systems for personal computers. In the 1990s, Microsoft identified an emergent threat to its Windows operating system monopoly. The rise of Netscape's Internet browser was central to a paradigm shift that threatened Microsoft's dominance. This threat was amplified by Sun's development of the Java programming language and Intel-developed hardware that was designed for use with Java. Microsoft CEO Bill Gates catalogued these threats in internal communications, most famously the "Internet Tidal Wave" memo that ultimately provided a road map to the antitrust case against the firm. (10)

      Netscape and Sun posed a nascent competitive threat. Neither were plausibly, at the time, substitutes for Windows. Netscape's offering did not compete with Windows. (11) However, Microsoft feared that over time they would evolve into substitutes, (12) and acted to neutralize the competitive threat.

      DNA sequencing. Illumina is the leading manufacturer of instruments that identify the order of nucleotides in a DNA sample, with a market share of 80 percent or more. (13) A second firm, PacBio, also makes sequencing equipment. PacBio uses a "long read" technology in contrast to Illumina's "short read" technology. (14) Historically, long read sequencing has been less cost-effective on a cost per genome basis, but over time, the cost and throughput of long-read technology have improved. (15) By 2018, according to the Federal Trade Commission (FTC), PacBio had become an increasing threat to Illumina's monopoly, with the expectation of further convergence to come. (16) Thus, PacBio posed a nascent threat to Illumina, which Illumina sought to eliminate by acquiring PacBio.

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