Nascent Competitors

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot

Author(s)

C. Scott Hemphill and Tim Wu

Source

University of Pennsylvania Law Review, Vol. 168, No. 7, pp. 1879-1912, 2020

Summary

Large incumbent firms may take steps to eliminate innovative nascent competitors, either by merger or by excluding them from the market.

Policy Relevance

Antitrust enforcers should block incumbents from eliminating nascent competitors.

Main Points

  • A "nascent competitor" is one whose innovation may present a serious competitive threat to a powerful entrenched firm.
     
  • Antitrust enforcers should protect nascent competitors from acquisition or exclusion by incumbents; enforcers should not need to prove that it is more likely than not that the target will take market share from the incumbent.
     
  • Enforcers should block an incumbent's involvement with a startup when the incumbent’s activities eliminate or impede a nascent competitor through exclusion or acquisition, and when the incumbent’s actions offer no competitive benefits to offset harm to competition.
     
  • The Clayton Act and the Sherman Act provide enforcers with a legal basis for actions protecting nascent competitors.
     
    • Section 7 of the Clayton Act could be interpreted to provide more protection for innovative potential competitors in merger assessments.
       
    • Section 2 of the Sherman Act, which prohibits the unlawful maintenance of a monopoly, has been broadly interpreted to protect nascent competitors.
       
  • When an incumbent acquires a nascent competitor, the acquirer's internal communications or conduct will provide key evidence that the acquisition is harmful; helpful evidence might include:
     
    • Internal messages showing the incumbent’s concern with threats of future competition.
       
    • Conduct intended to eliminate the nascent competitor.
       
    • A pattern of conduct such as acquiring rising competitors.
       
  • Enforcers should challenge mergers that have already been consummated; although divestitures are disruptive, enforcer's assessments will be more accurate when more evidence has accumulated.
     
  • An incumbent firm’s claim that its acquisition provided the startup with expertise and funding to incubate special capabilities should fail, unless the incumbent can show that these capabilities would not have been developed without the incumbent firm's intervention.
     
  • Focusing antitrust enforcement only on the conduct of firms most threatened by the nascent rival will leave other firms are free to invest in startups.
     

Get The Article

Find the full article online

Search for Full Article

Share