One of five antitrust bills introduced last week, The Platform Competition and Opportunity Act, would prohibit leading tech platforms from acquiring companies that are competitors or could potentially be competitors. Blocking these purchases hurts consumers in two way: It prevents the short-term consumer benefits these synergies often create and lessens the economic incentive to fund tech start-ups.
As an example of how these synergies can be beneficial for consumers, let’s take Facebook’s 2012 purchase of Instagram. The social media giant’s $1 billion acquisition of what then was a niche, buggy photo-sharing app elicited mockery from many and a green light from the Federal Trade Commission. By 2018, Instagram boasted more than 1 billion (presumably) satisfied customers, new features, and improved quality. Consumers benefited from the money, talent, and scale that Facebook was able to invest in Instagram’s platform.
If the authors of the legislation are concerned about big tech firms becoming entrenched, they should be even more concerned about killing the startups that could one day displace those market leaders. One of the profitable exits that generates early funding for nascent firms is the possibility of being acquired later on. This has been made inadvertently more important due to financial regulations that raise the costs of IPOs.
In order to spur innovation and secure the investment to bring new products to market, the incentive for profitability must be preserved. Consumers will suffer and market leaders will remain entrenched if one of the paths to profit is blocked be preventing acquisitions. The banning of acquisitions by large tech firms over concerns of abuse of market power is a classic example of how antitrust legislation often causes the very problem it proports to solve.