Nascent Competitors
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ARTICLE 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.
KEY TAKEAWAYS
- 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.
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About C. Scott Hemphill
Scott Hemphill is a professor of law at New York University School of Law where his research and teaching examine the balance between innovation and competition set by antitrust law, intellectual property, and other forms of regulation. His recent work considers competition in the pharmaceutical industry (in particular, “pay-for-delay” cases, which was a critical contribution to discourse leading to the Supreme Court’s 2013 decision in FTC v.
See more with C. Scott Hemphill
About Tim Wu
Tim Wu is the Julius Silver Professor of Law, Science and Technology at Columbia Law School. Widely known for coining the term net neutrality in 2002 and championing the equal access to the Internet, Professor Wu teaches about teaches antitrust, copyright, the media industries, and communications law, and his writing addresses private power, free speech, and information warfare.
