Joshua Gray and Cristian Santesteban show how the Federal Trade Commission could have used its 2023 draft Merger Guidelines to focus its challenges against Microsoft-Activision and Meta-Within squarely on the pressing economic concern of protecting competition during critical technological transitions making full use of the law’s traditional incipiency standard.

In a previous article, we argued that the Federal Trade Commission’s (FTC) recent cases against Microsoft-Activision and Meta-Within did not directly address the agency’s primary antitrust concern: the preservation of competition during critical transitions to new technological markets. Although the agency’s pleadings described this concern clearly, the agency obscured it in federal courts by focusing on narrow existing markets (fitness apps and consoles) and using antitrust merger doctrines that, at best, indirectly addressed the central issue.

The FTC may have perceived constraints or blind spots in the governing United States law that were an impediment to a frank presentation of the concern involving technological transitions, as we discuss in the next section. We believe that established legal doctrine has fallen behind economic thinking over the past two decades, and the FTC and Department of Justice (DOJ) must find ways to close this gap to bring up to date the common law construction of Section 7 of the Clayton Act.

In this article, we argue that the DOJ and FTC’s 2023 draft Merger Guidelines can provide a mechanism to close this gap. We examine Guidelines 5, 7 and 10 to show how the FTC could have coherently presented the arguments we believe were left out in Microsoft-Activision and Meta-Within.

These three guidelines substantively extend beyond the 2010 Guidelines’ emphasis on coordinated and unilateral effects to incorporate the most recent economic learning and experience from tech markets. Because these insights haven’t been put into practice yet, we would expect that the draft language used to guide their implementation will not be as developed as that from past Guidelines that describe more mature concepts. For this reason, these three “21st century” guidelines merit open-minded consideration as well as refinement.

Legal Discussion

Lawyers understand that Section 7 of the Clayton Act establishes an “incipiency standard” to the antitrust analysis of mergers. As a supplement to the Sherman Act, Congress intended the Clayton Act “to arrest the creation of trusts, conspiracies, and monopolies, in their incipiency and before consummation.” That is, this statute is explicitly focused on preventing probable future harms rather than actual harms. The conventional economic justification for the incipiency standard was articulated in the context of collusion; namely, that consolidation of competitors increases the risk of tacit collusion (or conscious parallelism), which is beyond the reach of Section 1 of the Sherman Act for lack of a legal “agreement.” When theories of harm from mergers do not turn on tacit cartel conduct, which is difficult to detect, define, or punish, this traditional economic justification for incipiency enforcement did not fit well.

This may explain why in practice, incipiency appeared to be eclipsed by an “actual harm” standard as unilateral effects (UE) became the most common theory of harm in merger enforcement over the past roughly 35 years. UE is somewhat easier to measure given that, in theory at least, they can be predicted from the characteristics of the merging parties themselves, i.e., whether they are direct and close competitors, as well as their behavior, both of which can be analyzed using scanner or other transactional data.

In this respect, theories of harm involving technological transitions may resemble more probabilistic concerns involving tacit collusion and may justify a return to the incipiency standard in merger analysis. The landscape of competition in a newly developing technological realm, like mobile computing in the 2010s, is inherently uncertain and especially difficult to predict from the vantage point of the competitive dynamics of the current established technological paradigm. From a policy perspective, the Agencies should maximize the opportunities for unbridled competitive dynamics to establish themselves, especially if competition in the established realm is constrained by a dominant incumbent’s market power. The risk from a merger involving a dominant firm during these transitions is that this firm has exceedingly strong incentives to maintain its dominance, and protect high rents from the legacy business, even as the technological ground is being removed from under it. That means that these types of mergers are infused with incentives to nip any nascent competition in the bud, which could translate into exclusion of potential rivals or increased barriers to entry or strengthened network effects. In our view, the undue risks for nascent markets during critical technological transitions fit as comfortably within Section 7’s incipiency standard as did the undue risks due to tacit collusion.

Based on public comments from some of the drafters, these Guidelines will often work together and reinforce each other. In this essay, we show how one might apply Guidelines 5, 7, and 10 in the context of Meta-Within and Microsoft-Activision, technological transitions, and Section 7’s incipiency standard.

Guideline 5

Guideline 5 addresses markets in which certain products or services are essential for competitors to effectively compete, such that a merger that creates one firm with undue control over these elements can harm competition in the present or future. This guideline can be applied in the context of technological transitions as the products the Agencies are concerned with include, among others, “related products rivals may use, now or in the future, as inputs” (emphasis added). In contrast to Guideline 7, Guideline 5 does not address or require a dominant firm or the extension of dominance. Rather, it assesses the competitive effects of a merger by evaluating access to vital products, services, or customers. The underlying economic rationale concerns the ability and incentive of the merged entity to acquire control over these critical elements and then weaken rivals or create barriers to entry or expansion for competitors.

For the defense, this guideline provides an avenue for the merging parties to show “that there are no plausible ways in which they could profitably worsen the terms for the related product and thereby make it harder for rivals to compete, or that the merged firm will be more competitive as a result of the merger.”

Guideline 5 would have allowed the FTC to present a more robust prima facie challenge to the Microsoft-Activision merger. Microsoft’s acquisition could be evaluated as an attempt to create a defensive “moat” around its gaming business by controlling inputs, such as Activision’s popular games, that were becoming more critical to future competition as the market evolved from consoles to subscriptions and cloud gaming.

As it did at the actual trial, Microsoft would have presented evidence that after the merger it could not “profitably worsen the terms for the related product and thereby make it harder for rivals to compete” in consoles. Emphasizing the future, the FTC might have established why the past is not prologue, and Microsoft’s control over Activision titles in multi-game download subscriptions could be used to substantially affect competition among rival cloud streaming providers (via tying or bundling arrangements of Microsoft’s download subscription and streaming subscription offerings, as we argued in a prior essay).

While Guideline 5 has some clear similarities with foreclosure analysis in vertical mergers, it expressly invokes elements of traditional UE horizontal merger analysis: “The Agencies may assess the extent of competition with rivals using analogous methods to the ones used to assess the extent of competition between the merging firms … For example, the Agencies may consider evidence about the impact on the merged firm of competitive actions by rivals that use the related product.”

This underlying concern with a reduction of competition between direct competitors due to the merger implies that the relevant tools for evaluating the intensity of competition will include familiar ones such as diversion ratios and merger simulation. While this may suggest that an actual harm standard may be applicable in the context of this guideline, when it is applied to technological transitions, an incipiency standard will more aptly fit. That is, when an acquirer buys a product that rivals may rely on to compete in the future in a nascent technological environment, there should be a strong policy emphasis on nipping these competitive concerns in the bud. The FTC might have utilized Guideline 5 to articulate how the merger poses significant risks to competition, innovation, and consumer welfare in a market with strong indirect network effects, where dynamics are still evolving, and future monopolistic control is a real possibility. By acquiring a degree of control over Activision’s loyal users, Microsoft could position itself to dominate subscriptions and distort for its own benefit the industry’s transition to cloud streaming. In this evolving context, the uncertainty inherent to an analysis of competition in an emerging tech sphere supports a judicial revival of the incipiency standard of Section 7.

Guideline 7

Guideline 7 stresses that mergers that entrench or extend a dominant firm’s position will be prohibited unless the merging parties can show that there exist merger-specific benefits to competition. This prohibition would apply in mergers that are neither horizontal nor vertical, a new addition to the Guidelines that we applaud. For our purposes, we focus on Guideline 7’s crystalline language concerning the extension of dominance across technological transitions. It describes why in markets with high barriers to entry due to network effects, competition is more likely to flourish during transitions and involve nascent or differentiated rivals:

At times, high entry barriers can become temporarily less effective in protecting a firm’s dominance. For example, technological transitions can render existing entry barriers less relevant, and a dominant firm might seek to acquire firms to help it reinforce or recreate those entry barriers so that its dominance endures past the technological transition. Further, technological transitions can create temporary opportunities for entrants to differentiate based on their alignment with new technologies. A dominant firm might seek to acquire firms that might otherwise gain sufficient customers to overcome entry barriers. The Agencies take particular care to preserve opportunities for deconcentration during technological shifts.

To be sure, there is an obvious affinity here with the theory of monopoly maintenance in US v. Microsoft, but the language does not echo Section 2’s requirement of conduct with an anticompetitive effect (i.e., that reduces competition in a way that harms consumers). Instead, it moves a step forward in time by focusing on ensuring that opportunities exist for rivals to develop a new product or technology that may improve overall welfare in a market that had been dominated by an incumbent protected by strong network effects.

Guideline 7 recognizes that a dominant firm’s actions can have a profound influence on competition when there’s a shift in the underlying technological paradigm, e.g., moving from desktop to mobile computing. Just as current law prevents mergers that might facilitate cartels, Guideline 7 may be construed to establish a prophylactic principle that dominant firms cannot use mergers to stifle potential competitors by reinforcing or raising entry barriers. The clear goal is to preserve the potential for future competition and is consistent with the incipiency standard of Section 7.

Using Guideline 7 in conjunction with Guideline 5, the FTC could have presented evidence that Meta’s acquisition of Within is a strategic move to extend its existing dominance in social networking into the VR platform market. First, Meta’s acquisition of the Supernatural VR fitness app would create the ability and incentive for Meta to withhold an effective input from other VR platform competitors. Effectively, this would be an application of Guideline 5 in the context of an already dominant firm (in this case, in social networking). The acquisition would thus threaten to create a VR platform with considerable monopoly power in the VR platform market. With a dominant position in VR platforms, Meta would be able to control the evolution of social networking in the VR space and maximize adoption of its own social networking offerings. In a Meta controlled VR platform future, users would be smoothly transitioned to VR versions of Facebook and Instagram.

The distinction between entrenching and extending market power is somewhat fuzzy in these contexts as one could either think that Meta is entrenching its social networking dominance in a nascent technological sphere or extending its dominance from the market for social networking on desktop and mobile devices into an entirely new market involving VR platforms. Regardless, the FTC could have contended that Meta is positioning itself to entrench or extend its market power, including protecting social networking ad revenue streams from disruption and preempting competitors like Apple from becoming a VR threat.

Carl Shapiro argued persuasively against a construction of Guideline 7 that omits anticompetitive harm. Fiona Scott Morton echoed this sentiment. One answer to their concern may be found in the efficiency justification in Section IV (Rebuttal Evidence) of the draft Guidelines that the drafters have assured on multiple occasions applies to all the Guidelines. Shapiro illustrated his concern with the example of Amazon’s acquisition of Whole Foods. As we understand the Guidelines, Amazon may argue that it is procompetitive for a dominant e-commerce company to enter by merger into the retail grocery market and increase competition by bringing its volume purchasing and technical or logistical know-how to awaken innovation in retail.

The Guidelines separately introduce an expanded notion of “merger specificity” that also partially addresses Shapiro’s concern. This concept is similar to the “less restrictive alternatives” analysis in conduct cases. The new definition expressly states that the less restrictive alternatives “include organic growth of one of the merging firms, contracts between them, mergers with others, or a partial merger involving only those assets that give rise to the procompetitive efficiencies” (emphasis added).

In the Meta litigation, the FTC could have used this language to present evidence that a Meta acquisition of FitXR or another fitness app with a smaller user base could have harvested any benefit of integration with less risk to future competition. Such evidence has clear relevance to the FTC’s theory that the acquisition of Supernatural in particular was a calculated strategy to extend dominance into an emerging field, potentially lessening future competition and stifling innovation.

Returning to Shapiro’s illustration, the balance of efficiencies and threatened harms from Amazon’s acquisition of Whole Foods appears to us an easy procompetitive case. If Amazon sought to extend that defense to, let’s say, a hypothetical acquisition of Costco the balance might tip in the other direction, either because Amazon might be neutralizing the opportunity for Costco to become a direct competitor in e-commerce or because it would be removing an innovative firm in retail that has consistently led the industry in providing high quality products at low prices. Removing that constraint in retail in general might have negative repercussions for competition in e-commerce as well.

We believe that protecting competition during technological transitions is of primary importance for merger analysis; yet, it is now only mentioned in a single paragraph in the entrenchment subsection of Guideline 7. We suggest that this issue be elevated to a more prominent position in the document. Because of the ambiguity in interpretation of entrenchment or extension of a dominant position in the context of technological transitions, we suggest delinking the tech transitions discussion from the entrenchment section and re-articulating it to encompass both the entrenchment and extension of a dominant position. This could also help to narrow the focus of Guideline 7 by making clear that its objectives are to close the current gaps in enforcement due to non-vertical, non-horizontal concerns and those involving technological transitions. Revised in this manner, Guideline 7 could allay the concerns of those like Shapiro and Scott Morton who found this guideline overly broad.

Guideline 10

Finally, the FTC could have used Guideline 10 concerning mergers involving multisided platforms to enrich its presentation of evidence under Guidelines 5 and 7. In contrast to those two guidelines, Guideline 10 does not articulate the elements of a theory of harm or the applicable defenses. Rather, it provides a frame around which to embed the theories stemming from those other two guidelines.

Central to Guideline 10’s economic rationale are network effects, where the value of the platform to one participant group, e.g., users, can depend directly on the number of participants in that group (i.e., other users), or indirectly on the number in another group (i.e., developers). This can lead to concentration as platforms become self-reinforcing, attracting more participants on both sides. The FTC might have included an analysis of these feedback effects to show that a critical mass of users on a platform attracts more developers and further strengthens the platform’s position.

Guideline 10 recognizes a dimension of platform-based competition that applies clearly to the Microsoft-Activision and Meta-Within mergers. The guideline explains how an acquisition can distort the competitive process in this manner:

A platform operator [e.g., Meta] may acquire a platform participant [e.g. Within], which can entrench the operator’s position by depriving rivals of participants and, in turn, depriving them of network effects. For example, acquiring a major seller on a platform may make it harder for rival platforms to recruit buyers. The long-run benefits to a platform operator of denying network effects to rival platforms create a powerful incentive to withhold or degrade those rivals’ access to platform participants that the operator acquires. The more powerful the platform operator, the greater the threat to competition presented by mergers that may weaken rival operators or increase barriers to entry and expansion.

The connection to Guideline 5 (foreclosing a key input for competition) is evident and made in the context of platform competition. The FTC could have argued that Microsoft’s proposed acquisition of Activision could harm competition between nascent game streaming platforms if Microsoft is able to hold exclusive or favored access to Activision’s games and its loyal users. Similarly, Meta’s ability and incentive to withhold Within’s Supernatural from other VR platform providers could lead to positive feedback effects for its own platform as Supernatural’s users attract developers in a virtuous cycle for Meta but a dismal one for competition. Meta’s dominance in VR platforms could then lead to worse terms for users and developers.

In summary, Guideline 10 encapsulates a multifaceted understanding of multi-sided platforms, reflecting the unique challenges posed by network effects and the potential for dominant platforms to entrench or extend their position (reinforcing the points addressed in Guidelines 5 and 7). By addressing these complex economic dynamics, it provides an essential framework for analyzing mergers in critical and rapidly evolving areas of the modern economy.

Closing Remark Regarding Evidence

To close, we pivot to the debate about legal expectations for evidence showing a proposed merger would have anticompetitive effects. If the law were to follow Judge Corely’s excessive burden of proof in Microsoft-Activision, which requires business strategy documents that confess to unfavorable facts about an indeterminate future, it will fall short of the purpose of Section 7. The common practice in high-profile transactions is for antitrust counsel to coach their clients about how to make favorable statements in business documents while avoiding statements that jeopardize sale of the firm. Parties also tailor their deal models to put their transaction in the best light. It is not hard to do when a document speaks to future events. Our legal system is reasonably adept at sorting out liability for past events, but it lacks effective tools for preventing parties from crafting wishful or self-serving narratives about what lies ahead. As such, to take on future competition concerns during tech transitions, it may make sense to articulate, as the draft Guidelines do, evidentiary principles concerning a necessarily speculative inquiry. Our one note of caution concerns the language in Appendix 1, which would distinguish between business records created “after the company began anticipating merger review” from those created in the “normal course.” For sophisticated firms, it will typically be impossible to know when the senior executives and boards of the merger parties first considered a transaction or anticipated regulatory review. Planning for strategic acquisitions or sales is a routine aspect of managing a large corporation or private equity firm.

Author Disclosures:

Joshua Gray has counseled clients about potential antitrust claims against several global technology firms, including Google. However, he did not represent any of the parties involved in the cases mentioned in this article. After more than a decade of working on antitrust M&A both at the FTC and in private practice, his practice transitioned to entirely conducting litigation after 2012.

In the last two years, with his consulting company RedPeak Economics, Cristian Santesteban has consulted for law firms doing preliminary investigations of antitrust issues involving Google. He has not done any consulting work relating to Microsoft-Activision, Meta-Within, or U.S. v Microsoft.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.