Australian merger laws are on the verge of revolution . In a fiery call for reform, departing ACCC commissioner Rod Sims recently proposed a slew of provocative changes to Australia’s merger control regime, which he argues is “skewed towards clearance” . For Sims the problem is fundamentally attitudinal:
In Australia, there appears to be excess weight placed on the capacity of market forces to overcome problems caused by a lack of competition in concentrated markets. There seems to be undue optimism that new entry will rapidly occur if firms attempt to exercise market power, or that a small number of large players will compete rather than simply accommodate each other so that all can make more profit .
I won’t here go into the details of Sims’ proposed revamp of Section 50 of the Competition and Consumer Act 2010, which prohibits mergers that are “likely to have the effect of substantially lessening competition in a market” as assessed against several structural factors including, inter alia, “the height of barriers of entry to the market” and “the level of concentration in the market” .
Suffice to say, Sims wants a total “mindset change” to how we conceptualise anti-competitive effect and market power –  a change which has competition practitioners and scholars ululating regulatory overreach . In particular, he wants Australian law to take more seriously the long-term danger to markets posed by mergers that suppress potential competition, i.e., non-horizontal mergers where the parties don’t presently produce substitutes but might one day (nascent firm mergers) . Think here of the tech markets where dominant incumbents like GAFA (Google, Apple, Facebook, Amazon) gobble up small innovative start-ups in adjacent, developing markets . Historically, the reaction from regulators to such transactions has been one of:
Superficially, what’s not to like? There is no immediate loss of competition, and a platform can provide execution capabilities, scaling opportunities and ideas and means for expansion in ways the target could perhaps not have dreamt of .
But in recent years there’s been a wave of scholarship and regulatory decisions globally that emphasise the potential harms of nascent firm mergers – from the neutering of a potential competitive threat , to the rival innovation forgone when a firm uses an acquisition as a shortcut into a new market rather than engaging in organic development . In the Google/Fitbit case, for instance, the ACCC opposed Google’s $2.1B purchase of Fitbit on the novel basis that the merger was likely to harm future competition in the “data dependent health services market” – a barely-established market in which neither Google nor Fitbit, who have no product overlap, had any real presence . Currently in the U.S. the Federal Trade Commission is seeking the divestiture of Instagram and WhatsApp from Facebook (now Meta) on the ground that Facebook made those acquisitions to “bury” these companies as challengers to its dominance .
There are several reasons why nascent mergers might not be a source of concern. They can inspire deep synergies and innovation efficiencies . The prospect of acquisition is a powerful incentive for entrepreneurs and equity investment . They can diminish appropriability concerns and thereby incentivise innovation efforts . And, critically, it is often impossible to determine ex ante (i) whether a particular start-up will actually become a competitive player in a market but-for the merger, (ii) the future competitive state of a highly dynamic market, and (iii) how consumers will actually be harmed where price is not a point of competition .
That last reason – essentially, that nascent merger analysis can devolve very quickly into speculation –  is probably the main roadblock to convincing the broader business and legal community of the need for reform . But there is another important roadblock – a basal assumption that has sustained much of the developed world’s competition policy of the 20th and 21st centuries but which Sims now demands the law must disenthrall itself from. This is the belief that “market power is always fleeting” and that markets will generally self-correct , as emblematised by the view of Joseph Schumpeter:
[T]he Schumpeterian view sees monopoly power as fragile. It argues that technology markets are subject to ‘major paradigm shifts [which] frequently cause incumbents’ positions to be completely overturned’, pressuring incumbents to innovate constantly to avoid being displaced by an innovative start-up. Regulators should therefore not be concerned about the removal of nascent competitors because incumbents remain subject to threats of effective entry and expansion .
Sims wants to purge Australian competition consciousness of this philosophy and instead adopt, as a sort of starting principle in considering nascent mergers, the anti-monopolist sentiment of Kenneth Arrow – that (a) incumbent market power is enduring, with the removal of potential competition having the effect of entrenching that power , and (b) that “it is only if there is the prospect of being chased, caught, and overtaken that there is a strong incentive to come up with better solutions” (i.e., monopolies destroy innovation) .
In this respect, whether we are attracted to potential competition theories of harm, and the ACCC’s calls for reform, will partly depend on whether we continue our Schumpeterian faith in the threat of effective entry as a disciplinary tool of anti-competitive conduct, or whether we think that threat is being hollowed out in today’s digital markets, where the concentration of data assets, network effects, and aggressive acquisition strategies increasingly appear to insulate incumbents from rivalry . As Sims and others are increasingly suggesting, it might be time for some scepticism in merger analysis:
We have proceeded for years on grounds that ‘Type 1 errors’ (the risk of overenforcement) are the most pernicious as they would ‘chill innovation’ stone dead, while ‘Type 2 errors’ (the risk of underenforcement) will quickly be corrected by the growth of rivals or new entrants. But the recent track record in tech put that argument convincingly in the ground: hundreds of acquisitions not investigated, failures to diagnose potential ‘killer’ acquisitions, multiple ‘reverse’ cases where the buyer turns off its own effort, and fewer incentives to invest in challengers ‘under the shadow’ of giants … Time to have some false positives after twenty years of false negatives .
 Coops, C., Kanton, H., and Armstrong, K. (2021). ACCC Merger Reforms: More Revolution Than Evolution. King & Wood Mallesons. 27 August 2021: https://www.kwm.com/au/en/insights/latest-thinking/accc-merger-reform-proposals.html; Editorial AFR. (2021). Sims still to make the case for revamping merger laws. The Australian Financial Review. 2 September 2021: https://www.afr.com/policy/economy/sims-still-to-make-the-case-for-revamping-merger-laws-20210901-p58nxr.
 Sims, R. (2021). Protecting and Promoting Competition. Competition and Consumer Workshop 2021 – Law Council of Australia, 27 August 2021. https://www.accc.gov.au/speech/protecting-and-promoting-competition-in-australia.
 Competition and Consumer Act 2010 (Cth), s 50: http://www5.autlii.edu.au/au/legis/cth/consol_act/caca2010265/s50.html.
 Note 2.
 King, S. (2021). Do digital platforms need updated merger laws, in The evolution of antitrust in the digital era: Essays on competition policy, v.2. (Evans, D., Fels, A., and Tucker, C. eds), pp. 163-179; McCowan, M., Gray, J., Reynolds, I. (2021). ACCC announces comprehensive proposals to reform Australian merger laws and review processes. Corrs Chambers Westgarth. 30 August 2021: https://www.corrs.com.au/insights/accc-announces-comprehensive-proposals-to-reform-australian-merger-laws-and-review-processes; Carver, L., et al. (2021). Proposed merger reforms: ACCC seeks to increase power to block deals. Herbert Smith Freehills. 31 August 2021: https://www.herbertsmithfreehills.com/latest-thinking/proposed-merger-reforms-accc-seeks-to-increase-power-to-block-deals. Avery, E., et al. ACCC heralds its proposal to reform the Australian merger control regime. Gilbert + Tobin. 31 August 2021: https://www.gtlaw.com.au/knowledge/accc-heralds-its-proposal-reform-australian-merger-control-regime.
 Motta, M., & Peitz, M. (2021). Big tech mergers. Information Economics and Policy, 54, 100868.
 In the past six years Apple alone has averaged three acquisitions per week – mostly of companies you never would have heard of: https://www.cnbc.com/2021/05/01/how-apple-does-ma-small-and-quiet-with-no-bankers.html.
 Caffarra, C., Crawford, G., & Valletti, T. (2020). How tech rolls: Potential competition and ‘reverse’ killer acquisitions. Antitrust Chronicle, 2(2), pp. 15–16.
 Cunningham, C., Ederer, F., & Ma, S. (2021). Killer acquisitions. Journal of Political Economy, 129(3), pp. 649-702.
 Note 9.
 ACCC. (2020). Statement of Issues: Google LLC – proposed acquisition of Fitbit Inc. 18 June 2020: https://www.accc.gov.au/public-registers/mergers-registers/public-informal-merger-reviews/google-llc-proposed-acquisition-of-fitbit-inc.
 Federal Trade Commission v Facebook Inc (Memorandum Opinion) United States District Court of Columbia, January 11 2022.
 Bishop, S and Stephen Lewis, S. (2018). How Merger Control Rolls: A Response to Caffarra, Crawford and Valletti. RBB Economics. December 2020, quoting Langus, F., & Valletti, T. (2018). Horizontal mergers and product innovation. International Journal of Industrial Organization, 59: “a merger may bring together complementary R&D assets or lead to higher productivity in R&D by enabling cost efficiencies. Sufficient innovation efficiencies overturn the reduction in innovation due to market power, and ultimately also offset the negative impact of a merger on consumer welfare.”
 “The pro-competitive potential of such vertical and conglomerate mergers is well-established”: Sinn, J. (2021). Managing nascent digital competition: An assessment of Australian merger law under conditions of radical uncertainty. UNSWLJ, 44, 919, p. 929, quoting Digital Competition Expert Panel, ‘Unlocking Digital Competition’, 90–1 [3.39].
 Shapiro, C. (2012). Competition and innovation: did arrow hit the bull’s eye?. In The rate and direction of inventive activity revisited (pp. 361-404). University of Chicago Press, p. 364.
 Note 14, p. 5.
 Ezrielev, J. (2021). An Economic Framework for Assessment of Innovation Effects of Nascent Competitor Acquisitions. Competition Policy International: https://www.competitionpolicyinternational.com/shifting-the-burden-in-acquisitions-of-nascent-and-potential-competitors-not-so-simple/.
 AFR Editorial. (2021). Sims still to make the case for revamping merger laws. 2 September 2021.https://www.afr.com/policy/economy/sims-still-to-make-the-case-for-revamping-merger-laws-20210901-p58nxr: “regulators should always be cautious of their ability to efficiently second guess how markets will evolve.”
 Khan, L. M. (2016). Amazon’s antitrust paradox. Yale lJ, 126, 710, 720.
 Note 15, 924; Schumpeter, J. (1942). Capitalism, Socialism and Democracy. New York: Harper & Brothers, 2008.
 Note 15, 923.
 Note 9. See further Arrow, K. Economic Welfare and the Allocation of Resources to Invention’ in National Bureau of Economic Research (ed), The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton University Press, 1962) 609.
 Bryan, K. A., & Hovenkamp, E. (2020). Startup acquisitions, error costs, and antitrust policy. The University of Chicago Law Review, 87(2), 334: “One cannot expect potential entrants to discipline anticompetitive behavior if they are consistently absorbed by powerful incumbents”; Stucke, M. E., & Grunes, A. P. (2016). Introduction: big data and competition policy. Big Data and Competition Policy, Oxford University Press; Robertson, V. H. (2020). Antitrust law and digital markets: a guide to the European competition law experience in the digital economy. Available at SSRN 3631002.
 Note 9.