Digital Markets: Need for a New Approach to Merger Regulation

[Manasvin Andra is a 4th year B.A., LL.B. (Hons.) student at NALSAR University of Law School, Hyderabad]

The emergence of digital markets has heralded a remarkable shift in antitrust law, with the impact of mergers on potential competitors attracting particular attention in recent years. While authorities in the United States (‘US’) and the European Union (‘EU’) have begun deliberating on solutions to these challenges, India arguably lags behind in important respects. Progress has been made through the report of the Competition Law Review Committee (‘CLRC’); however, a lot remains to be done in the context of strengthening India’s combination enforcement.

In this post, I aim to make the argument that effective regulation of combinations in the digital market can only be achieved if the Competition Commission of India (‘CCI’) embraces newer theories of harm. In particular, I argue that the CCI must take into account two recent and related ideas: that of nascent competitor acquisitions and “killer” acquisitions. These ideas have attracted attention due to their ability to transform the effectiveness of enforcement in digital markets, and must find a place in the Indian regulatory landscape.

The New Theories of Harm

While theories of harm pertaining to vertical and horizontal effects have proved fruitful in assessing the vast majority of mergers, digital markets have created situations where they tend to lose their effectiveness. This starts with the prevalence of network effects. Since the value of products is derived from the number of consumers who use it, these markets point towards concentration where acquisitions are an easy way for companies to consolidate their position. Further, these mergers are generally not reviewed because they do not meet the thresholds, while still contributing to adverse effects on competition by removing a potential threat to the incumbent. As a result, a need exists to identify and prohibit these mergers, which can only be achieved through newer theories of harm.

Nascent Competitor Theory

As noted by Scott Hemphill and Tim Wu, the nascent competition theory generally covers prospective innovation by a future competitor. More specifically, the definition has three aspects: first, that the technology brought by the nascent firm provides the foundation for an innovative platform; second, that its potential has not yet been fully recognised; and third, that the innovation might pose a serious threat to the business of a dominant incumbent.

Since the theory cannot be so broad as to encourage undue intervention, Hemphill and Wu’s theory is restrictive: it only covers firms that contribute to technical progress or to new business ideas that are able to capture consumer interest. It leaves out instances where the start-up does not innovate but still poses a threat to the incumbent, and where firms produce goods facilitating third party competition. One answer to the problem of identifying such instances could be to examine the response of competitors to firms that pose a threat to the incumbents. This would make intervention easier, since the primary challenge is the fact that regulators are hesitant to intervene given the uncertain nature of the nascent firm’s trajectory.

Killer Acquisitions

The term ‘killer acquisitions’ refers to instances where a merger is carried out for the specific purpose of discontinuing the product being developed. The term was coined in an empirical study of the pharmaceutical industry, wherein it was found that more than 6% of acquisitions of new entrants fell within the category. The nature of the pharmaceutical sector contributes to this phenomenon, since a firm with a patent over a product would be interested in quashing the emergence of viable alternatives. This effect is particularly strong where the market sees low competition or when the patent is far from expiration.

The theory’s appeal to regulators is clear when one considers the fact that that most start-up acquisitions cannot be reviewed. As a result, there is no way of knowing whether the acquirer is quashing the products and hindering competition. For example, Facebook’s acquisition of WhatsApp in 2014 did not meet the threshold in Europe and was only reviewed after referrals by multiple member states, though it was not a killer acquisition. This lacuna has prompted calls for reform in merger laws, with the killer acquisition theory becoming a touchstone in discussions surrounding antitrust scrutiny of the sector.

Responses from the European Union and the United States

The Furman Review commissioned in the United Kingdom (‘UK’) found that, over the last decade, Big Tech companies have made around 400 acquisitions globally. Another study analysed the acquisitions carried out by Big Tech over a three-year period, where they found that the brand of the acquired firms was closed within a year of the acquisition in 105 cases. These studies brought to light the under-enforcement that is prevalent in digital markets, whose risks were emphasized by the Stigler Committee on Digital Platforms set up in the US.

These issues have been closely scrutinised by the EU, which has recognised the dangers of under-enforcement in a market prone to concentration. The utility of thresholds has been re-examined, with Germany and Austria taking steps to introduce transaction value thresholds to capture situations where companies with little turnover are purchased. These entail notification of mergers if the value of the consideration paid in return for the transaction is more than 400 million euros and the target is ‘significantly active’ in Germany. The UK uses the share of supply test, wherein the Competition and Markets Authority (‘CMA’) can review a transaction if parties have a share of supply exceeding 25% and the transaction would lead to an increase in that share.

However, even in jurisdictions where regulators have some amount of flexibility, nascent competitor acquisitions have been allowed to pass without scrutiny. This seems to be evidence of a bias towards inaction, on the grounds that such mergers generally do not have anticompetitive effects.

Here, the primary obstacle lies in devising the counterfactual. Deploying strategies used in the case of mature firms to arrive at the counterfactual is a challenging task. The relevant timeline might vary depending on when the competitive pressure is exerted, while uncertainty about the future leads to conservatism on the part of regulators. Suggestions have been put forward for a composite counterfactual which takes into account the strength of the competitive threat but for the merger and avoids both dystopian and “nirvana” counterfactuals. The counterfactual must take into account factors like the market power of the incumbent and the substitutability between the products: the idea is that in the absence of the historical data, qualitative evidence can be collected to assess whether the price for the merger involves payments for non-existent synergies.

In the US, Hemphill and Wu have proposed using an approach that combines section 7 of the Clayton Act and section 2 of the Sherman Act, with the idea being to prohibit conduct that is capable of contributing to the maintenance of the incumbent’s market power. This approach does not seek to prove a successful entry of the nascent company in the counterfactual world, but only requires that the acquisition leads to the probability of a highly detrimental loss to the market.

In cases where the start-up has begun operating in the incumbent’s market, a section 7 complaint can make use of the presumption of illegality for horizontal mergers to block the transaction. However, the more important tool is section 2, which applies to exclusionary conduct undertaken by entities with monopoly power. In these cases, the burden on the regulator only extends to demonstrating that the conduct (the merger) is reasonably capable of contributing to the maintenance of market power. This would mean that showing the likelihood of successful entry but for the deal would be unnecessary, which is important to prompt regulatory action. Finally, section 2 is suggested as the ideal tool since it brings multiple acts within its purview, including acquisitions where the intent is to eliminate a competitor. For example, if Microsoft attempted to acquire Netscape to eliminate the latter as competition, it would have amounted to exclusionary conduct. This is a necessary conclusion since an acquisition in such cases would amount to the elimination of a competitive threat.

The Case for Adopting a Uniform Enforcement Policy

In India, recent acquisitions demonstrate why there is a need to incorporate these theories into the fold. During the acquisitions of Jabong and TaxiForSure by Myntra and Ola respectively, the CCI did not examine the mergers’ impact on competition since they fell below the thresholds. In both cases, the older brands were shuttered sometime after the merger, with the  closing of Jabong and the shutting down of TaxiForSure name after the businesses were integrated. This represents a clear case of killer acquisitions, which also resulted in consolidation of the relevant market and a lessening of competition.

As part of the CLRC’s recommendations, the draft (Competition) Amendment Bill, 2020 contains provisions allowing the CCI to define new thresholds for merger notification. Given that this allows the CCI to notify deal value thresholds for specific sectors, there is a greater likelihood of capturing acquisitions like Jabong and TaxiForSure in the future. However, it is important that such deals are specifically recognised as killer acquisitions, rather than just as agreements causing an appreciable adverse effect on competition. This will ensure that a different approach is adopted when dealing with such instances where, for example, the need to establish a counterfactual does not place an undue burden on the regulator.

However, ensuring effective enforcement cannot be accomplished merely with the institution of deal value thresholds: other measures will have to be taken to provide adequate oversight. Apart from considerations involving the counterfactual, a number of authorities have suggested reversing the burden of proof when it comes to acquisitions of nascent competitors. Such a structural presumption against combinations is not novel and is already used in some cases in the US. Another idea suggests that where the acquirer occupies a dominant position, parties to the merger must produce evidence that the situation would not be anticompetitive. In the absence of such proof, the merger should be blocked in order to protect consumer welfare.

Another proposal is the adoption of a balance of harms approach to replace the balance of probabilities test. The reason for this is that the latter requires conclusive evidence of future growth, which is rarely available in the case of potential competitors. This makes it preferable to look at the likelihood of harm (and the scale of anticompetitive effects in the event that it does) and seek intervention where the scale of harm is higher.

Ultimately, India’s success in terms of regulating mergers in the digital market depends on the CCI moving taking developments in jurisprudence into account. While adopting the approaches mentioned above would result in a shakeup of existing merger practices, it can be argued that digital markets merit a strong response in view of their challenges. Even if the Act does not receive further updates, targeted guidance notes published by the CCI can clarify their approach to digital markets and elaborate on the theories underpinning this perspective. This depends crucially on the adoption of a philosophy that takes into account the new challenges posed by Big Tech – therefore, there is a need for the CCI to evolve an enforcement policy that incorporates these ideas.


The aim of this post has been to underscore the need to change India’s merger control regime with reference to the challenges posed by Big Tech. For this, it was necessary to highlight the new phenomena that have emerged in this area, as well as the challenges faced by more advanced jurisdictions. India’s consistent ‘one size fits all’ approach has served it well as far as ease of doing business is concerned, but the emergence of digital markets means that its approach to such issues needs to undergo a radical shift. The proposals mentioned in the paper are in furtherance of this goal. It is only if the CCI begins to shift its approach to the new challenge that it will be able to effectively fulfil its goal of preserving competition and protecting consumer welfare.

Manasvin Andra

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