The Big Ban(g) Theory

• Publication year: 2022

The Big Ban(g) Theory

Max Chen
maxchen030@gmail.com

Liu Ming Xin

THE BIG BAN(G) THEORY

Max Hua Chen

Liu Ming Xin

TABLE OF CONTENTS

I. INTRODUCTION.................................................................................54

A. The Big Tech Merger Concern .................................................. 54
B. Motif.........................................................................................55

II. HOW DOES THE CURRENT LEGAL FRAMEWORK ADDRESS MERGERS?.......................................................................................56

A. General Note ............................................................................ 56
B. Horizontal Merger Control....................................................... 56
C. Non-Horizontal Merger Control ............................................... 57

1. Pre 2020 ............................................................................. 57
2. Post 2020............................................................................ 58

III. WHAT ARE THE LIMITATIONS TO THE CURRENT LEGAL/REGULATORY FRAMEWORK?..................................................................................59

A. Weak Horizontal Merger Enforcements..................................... 59
B. Weak Non-Horizontal Merger Enforcement .............................. 60

IV. ABSOLUTE BAN................................................................................61

A. Mergers in General...................................................................61
B. Small Firms Operating in Related Markets ...............................62
C. Horizontal Mergers .................................................................. 63
D. Killer Acquisitions .................................................................... 64
E. Non-Horizontal Mergers........................................................... 64

V. CONCLUSION....................................................................................65

I. INTRODUCTION

A. The Big Tech Merger Concern

The term "Big Tech" is referred to: Amazon, Apple. Facebook (Meta), Google and Microsoft. These companies are the five largest multinational online service or computer hardware and software companies and have the top position

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in the stock market by market share¹ Data indicated that these five firms have made over 700 acquisitions from 1987 to 2019² (Google 32%, Microsoft 31%, Apple 15%, Amazon 11%, and Facebook 11%). After 2001, The DOJ and FTC began to use NAICS codes to report HSR (Hart-Scott-Rodino) transactions. The code name is NAICS 518 for data processing, hosting, and related services (mainly including Google, Amazon, Facebook)³ Over 200 transactions were reportable between 2001 and 2017 and only one of which was challenged by the DOJ in federal district court - the Google/ITA case⁴ This rate, as a percentage of transactions cleared to the agencies over the period, is about 3%, which is significantly lower than that of 13% across all sectors⁵

All this data raises controversy in relation to the effects of the dominance and overpowering of the Big Tech to innovation and market entry; incentives to compete on price and nonprice dimensions; and the potential for Al-driven biased pricing and other theories of harms⁶ . In realising this growing power of the Big Tech and underenforcement in regulations, US Senator Josh Hawley proposed the bill of "Bust Up Big Tech Act" on April 19^th 2021⁷ , which will "crack down on mergers and acquisitions by mega-corporations and strengthen antitrust enforcement to pursue the breakup of dominant, anticompetitive firms", according to him⁸

B. Motif

In section 2, this article examines the US regulations on both horizontal and non-horizontal mergers and the evolution of the law in the past 60 years. In section 3, the article looks at how the law interacts with the Big Tech merger

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and acquisition activities and introduce the shortcomings to the existing system. In section 4, the article in-depth analyses the theories of harm and what would happen if an authority banned all the mergers and acquisitions for the Big Tech. In section 5, the article briefly expresses the authors' view regarding to what extend the authors agree with "The Big Ban(g) Theory".

II. HOW DOES THE CURRENT LEGAL FRAMEWORK ADDRESS MERGERS?

A. General Note

Hart-Scott-Rodino Antitrust Improvement Act⁹ placed responsibility to review mergers to the Department of Justice and the Federal Trade Commission. The two "big guns" in the legislation are the Sherman Antitrust Act and the Clayton Act¹⁰ While s. 2 of the Sherman Act is concerned with unilateral exclusionary conduct, s. 7 of the Clayton Act prohibits mergers and acquisitions that may 'substantially lessen' competition¹¹

For the procedures of a merger case: firstly, very large mergers will be notified to both the DOJ and the FTC before the merger's completion per HSR threshold requirement¹² ; secondly, the agencies would negotiate with the merging entities; finally, the binding result of negotiations would be in either a Consent Order by the FTC or a Consent Decree by the federal court at the request of the DOJ¹³ After the second stage, the negotiations could lead to a clearing of the transaction; or initiating proceedings to block it; or reaching a remedial agreement with the parties to alleviate possible competition concerns¹⁴ .

B. Horizontal Merger Control

Professor Carl Shapiro¹⁵ had observed a gradual weakening of the US antitrust law on horizontal mergers. Three stages can be roughly divided:

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The article calls the first stage the "golden era" of the "structural presumption". In Philadelphia National Bank¹⁶ , the Supreme Court held that any merger that would result in a "significant increase in the concentration of firms in that market is inherently likely to lessen competition substantially" by holding an undue percentage share. Mergers will only be allowed if this presumption can be rebutted by clear evidence. In a subsequent case¹⁷ , the court ruled out - efficiencies as a defence to illegality. The 1968 Merger Guideline reflected these rulings and focused largely on the market shares of the merging firms.

The second stage marked the fall of "structural presumption" (this can be partially accredited to Chicago School's pro-efficiency merger revolution). In the DOJ's 1982 Merger Guidelines, they gave less weight to market shares and raised the threshold levels of concentration that would trigger the structural presumption. To make things worse, the DC Circuit departed from the Supreme Court's 1960s precedents and stated that "evidence of market concentration simply provides a convenient starting point for a broader inquiry into future competitiveness"¹⁸

The third stage was the rise of the "effect-based approach". Three subsequent revisions were made on the Horizontal Merger Guidelines in 1992, 1997, and 2010, where less weight was given to market shares and greater weight to the effect of the merger on competition. The 1992 Guidelines introduced "unilateral effects" to focus on loss of direct competition; the 2010 Guidelines supplemented with concepts of upward pricing pressure, merger simulation, and bidding and auction model.

C. Non-Horizontal Merger Control

1. Pre 2020

Non-horizontal merger enforcement observed a similar trend as its horizontal counterpart, although with arguably less scrutiny¹⁹ :

In 1950, the Clayton Act had no definition of what conduct substantially lessens competition or tends to create monopolies, so the court used to apply a higher level of scrutiny in non-horizontal merger cases.

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The two leading cases from the 1960s highlighted the harm of foreclosure in Brown Shoe 1962²⁰ and entrenchment in Procter 1967. The 1968 Merger Guidelines included both theories.

But in the 1970s, the Chicago School criticises the approach by stating there is obvious advantages in improving economic efficiency²¹ In response to this criticism, agencies and courts dramatically changed their attitude toward enforcement for non-horizontal mergers. And unsurprisingly in 1982's revision of DOJ's Guidelines, they omitted the foreclosure and entrenchment theories and replaced them with a presumptive standard of efficiency for non-horizontal merger enforcement and added some empirical analytical tools including Hypothetical Monopolist Test and Herfindahl-Hirschman Index.

Two years later in 1984, the DOJ published a slightly revised version of the Guideline. It still left out the foreclosure theory, which is the theory of harm alleged in almost 70% of non-horizontal merger enforcement actions brought by the DOJ and FTC between 1995 to 2015²²

2. Post 2020

On June 30^th , 2020, the DOJ and FTC replaced the 1984 Non-Horizontal Merger Guidelines with the 2020 Vertical Merger Guidelines (VMG). As Michael Salinger²³ commented the guidelines are "muddying the waters instead of clarifying them", the guidelines were not making the agencies life easier. However, in September 2021, President Biden's FTC rescinded it, claiming they represented a "flawed economic theory regarding purported pro-competitive benefits of mergers".

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III. WHAT ARE THE LIMITATIONS TO THE CURRENT LEGAL/REGULATORY FRAMEWORK?

A. Weak Horizontal Merger Enforcements²⁴

On April 9, 2012, Facebook announced its acquisition of Instagram at $1 billion, The FTC reviewed the acquisition and on August 22 the same...