By Scott Hemphill (Le Concurrentialiste)
Economics plays a central role in modern antitrust. When parties seek clearance for a merger, they offer sophisticated predictions about price, quality, and innovation. When decision-makers fashion a rule to govern a set of cases, they try to minimize costly errors—so-called false positives and false negatives—in selecting the best rule.
Yet economic thinking in antitrust has a blind spot. It struggles when confronted with uncertain or low probability competitive harms. It is intuitive, even obvious that, say, a 20 percent chance of a billion-dollar consumer harm is something we ought to avoid if we can. Avoiding a harm with a large expected value (here, $200 million) is a valid and even pressing goal for antitrust enforcement. If we ignore such harms, effectively discounting low probability harms to zero, we permit serious anticompetitive conduct to slip through the cracks.
Lately, I’ve been thinking about this problem in the context of acquisitions of nascent competitors—firms whose prospective innovation represents a serious future threat to an incumbent. For example, Instagram and WhatsApp were nascent competitors for Facebook at the time Facebook acquired them. A promising but unproven cure for a disease represents nascent competition for a therapy that is the current standard of care. Upstart nascent competitors are an important source of innovation, both in their own right and because they spur the incumbent to innovate in response. What to do about the elimination of nascent competition is therefore an urgent concern for antitrust authorities and commentators all over the world…