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HomeTop NewsIs Microsoft-Activision Opposition a Repetition of Vons-Shopping Bag?

Is Microsoft-Activision Opposition a Repetition of Vons-Shopping Bag?

President Joe Biden’s Federal Trade Commission (FTC) appointees have an affinity for returning to an earlier era’s antitrust enforcement, sometimes summarized as a “big is bad” or “neo-Brandeisian” approach. The most famous (or notorious) current example is the FTC’s opposition to the proposed merger between Microsoft and Activision.

In their words, the merger would give Microsoft “both the means and motive to harm competition.” How could that happen? Supposedly by “manipulating Activision’s pricing, degrading Activision’s game quality or player experience on rival consoles and gaming services, changing the terms and timing of access to Activision’s content, or withholding content from competitors entirely, resulting in harm to consumers.”

However, the FTC’s fears about higher prices for Activision games are the opposite of what will happen—lower costs for gamers’ access to their favorite games. Its fears about lowering game quality or player experience conflict with Microsoft’s postmerger incentives—to get their money’s worth by attracting more players to its games. The FTC’s fears of Microsoft worsening terms of access for its rivals, or even cutting them out entirely, are also at odds with Microsoft’s incentives to increase, rather than decrease, their very large revenue streams from Call of Duty and other franchise games that are played on other systems as well as its own, as illustrated by its offer of legally binding ten-year contracts to not worsen terms to rival makers (which Sony rejected). In other words, the FTC is painting a dystopian picture of the effects of the merger because it could conceivably happen. Unfortunately for the FTC’s stated reasons for opposition, however, it is not what could conceivably happen that matters; instead, it matters as to what is in Microsoft’s and Activision’s interests.

Even the European Union has approved the Microsoft-Activision deal. Given that the current FTC appears to perceive the European Union’s antitrust decision-making matrix as the global model to follow, with the Wall Street Journal reporting that it often collaborates with the international organization to advance antitrust policy, one would think that the FTC would follow its lead and greenlight this merger. Yet, the FTC remains steadfastly against the Microsoft-Activision deal.

It is striking how closely the claims the FTC is making to justify its opposition to the Microsoft-Activision merger reflect one of the most famously foolish court decisions on mergers in the era they wish to revive—the Supreme Court’s 1966 rejection of the proposed merger of Vons Grocery with Shopping Bag Food Stores, which former FTC head Timothy Muris called an illustration of “an incoherent era of case law.”

Neither merger would create anything like a dominant share of the relevant market, and without that, claims of threatened abuses of monopoly power are unconvincing. The Vons-Shopping Bag merger would have created a combined share of the Los Angeles market in the single digits. Similarly, the Microsoft-Activision combination “would only control 10.7 percent of the gaming market as a publisher.”

Not only did the market shares in both cases indicate there was no incipient market dominance that could harm consumers, but also because the firms largely served different markets, the FTC overstated the potential for harm. The district court, which ruled in favor of the Vons merger (before the Supreme Court reversed it), found that “Vons stores were in the southern and western parts of Los Angeles, while Shopping Bag was more in the north and east,” meaning that the calculated share “greatly exaggerated the extent of the overlap.” In the case of Microsoft, the merger would provide “a toehold in mobile gaming—where most people game and where Microsoft’s Xbox currently has virtually no presence,” and entering a concentrated market in which it had almost no presence expands, rather than contracts, competition.

In both cases, stopping the merger would not increase competition. It would erect barriers against the entry or expansion of more efficient competitors, which protects not competition but current firms from competition. In the Vons case, the economies of scale, logistics, etc., produced by the combination, as in many other markets where chains were booming, would lower costs and expand consumer choices, which would have raised the customer-imposed bar other grocers had to meet to keep them.

In the Microsoft case, the merger would add a great deal of value to its Game Pass subscription service, making Microsoft’s offerings far more attractive at a time where mobile gaming is the big growth area. Improving those offerings, when Game Pass has already attracted over twenty-five million subscribers, would attract many more, offering more attractive terms to vast numbers of gamers than what is available to them now, not threatening to harm them via some monopoly abuse.

That is, in fact, the key to understanding why Sony is the spearhead of opposition to the merger. One commenter said that “virtually no one opposes the deal, except Sony.” Sony would have its dominant position in video game platforms undermined by better and more flexible options. And one of the clearest signs that improved options are being offered (i.e., the competitive process is being enhanced) is when rivals oppose them but consumers favor them.

Further, any claims of dominant power being created today, leading to consumer harm, are undermined by the rapid growth of the gaming market, just as was the case for the booming supermarket industry in Los Angeles in the 1960s. The potential profits from better serving a rapidly growing market dominate those gained from using one’s market power over existing customers and shrinking their number.

That better service involves lower prices and better options. In Vons’s case, chains’ ability to expand offerings and lower prices were the obvious draws compared to smaller stores. And Microsoft’s Game Pass, especially if it is expanded to include Call of Duty along with a raft of other games, will offer more flexible and cheaper options than buying each game separately. For instance, it would allow trying out a host of games you are not sure you would like at a lower cost (as part of a bundle) than having to buy them up front. Further, one would not have to buy multiple consoles to get access to favorite but exclusive games. (Interestingly, Sony, leading the “it would be anticompetitive” charge against the Microsoft-Activision merger, has far more games exclusive to its platform than anyone else.)

The Vons-Shopping Bag merger case, a little more than half a century ago, produced a ruling that may have been dressed up as procompetitive but was sharply anticompetitive. It restricted the competitive process in favor of protecting some producers from competing with others who served consumers better. It even led to one the most famous lines from a Supreme Court dissent when Justice Potter Stewart wrote, “The sole consistency that I can find is that, in [merger] litigation . . . the Government always wins.” Given how the current FTC seems to want to return to “winning” more often in cases where a deal “aims to increase the welfare of consumers,” as with the Microsoft-Activision merger, we would do better to follow reality than the FTC’s rhetoric.