We are all familiar with stories of digital innovators disrupting traditional business models and markets: companies like Uber, Airbnb, Deliveroo, and Netflix have not only changed how we buy the same old goods or service but what we want to buy at all. Almost all markets are now more susceptible to rapid new entry, disruptive business models and heightened competition as companies race to take advantage of technological innovations. Competition regulators have been grappling with how to take into account the effects this innovation may have on future behaviour.
Some companies are using innovative market entry to support the case for obtaining merger clearance from regulators – in some cases successfully arguing that their merger should go ahead because (anticipated or actual) rapid change in the market caused by new innovative players means that the merger would be unlikely to lessen competition, and may even be pro-competitive. In a recent review of cases where the regulator has taken disruptive market entry into account, we found they share certain key features, including:
- Recent entry by innovative business models has been accepted as evidence of effective future constraints on mergers of incumbent market players
- Entrants with strong branding and technological expertise (e.g. in other product areas) are more likely to be accepted as exerting a competitive constraint
- Traditionally problematic mergers (e.g. 3-to-2 or high combined shares) may be cleared when they are seen as providing a counterweight to a strong dominant player benefiting from network effects
- Disruptive innovation can fundamentally change the parameters of competition.
However, in other cases the regulators have rejected arguments as to the constraining effect of disruptive market entrants. Companies contemplating deals that may seek to rely on these kinds of market development will need to provide compelling evidence on the constraints posed by disruptive entrants: a high hurdle to clear.