The Amazon is a river in Africa

Competition in digital markets is a focus area for many countries at the moment. The US and the EU are looking in detail at digital markets, and in South Africa there is an ongoing market review of different aspects of them. The assessment of innovation and potential competition in mergers in digital markets is important in many of these processes as regulators are concerned that large digital firms are prone to acquiring small innovative competitors before they transform into credible competitive threats. The EU’s public stance is that a merger’s impact on innovation should be expressly assessed when digital markets are implicated.

21 Jul 2021 2 min read Competition Law Alert Article

At a glance

  • Competition authorities in the US, EU, and South Africa are focusing on digital markets and assessing the impact of mergers on innovation and potential competition in these markets.
  • Evaluating the impact of mergers on innovation in digital markets is challenging due to the difficulty in gathering empirical evidence. South Africa's Competition Act requires consideration of potential competitive constraints and innovation in merger assessments.
  • The South African Competition Commission has expressed concerns about large firms acquiring small innovative competitors, reducing innovation in the large firm's business. However, it may overlook the competitive constraints posed by established global firms in digital markets, which have the resources and technology platforms to enter the South African market. Proper assessment of existing competition by international firms is crucial, especially with proposed amendments to small merger guidelines in digital markets.

The impact of mergers on innovation and potential competition in digital markets is controversial because there are difficulties surrounding the evidence required to assess these considerations empirically. In South Africa, the Competition Act 89 of 1998 (Act) requires that potential competitive constraints and innovation be part of merger assessments. The Act identifies potential import competition, barriers to entry and innovation dynamics as important considerations. Given that South Africa requires prior notification and approval for economically significant mergers, the assessment is forward-looking, predictive and probabilistic, involving a certain level of speculation and conjecture.

The Competition Commission (Commission) recently made submissions to the Organisation for Economic Co-operation and Development (OECD) reflecting its perspectives on potential competition in digital market mergers. In contrast with the global experience, in South Africa large firms, as potential innovators, seek to merge with maverick entrants, which reduces innovation in the large firm’s business.

What is interesting is that in its OECD submissions, the Commission noted that in many digital markets there are established, well-resourced firms in other jurisdictions that are multiple times the size of their South African counterparts. These global counterparts have ready-built technological platforms and business models which can be leveraged to reduce the costs of entry into the South African market.

The Commission seems reticent to consider the potential competitive constraints that these firms may represent. For example, the Commission stated in its OECD submissions that “whilst Amazon has entered South Africa in cloud computing and data centres, to date it has not established an eCommerce presence”. This is an interesting view, given that Amazon itself advertises the fact that it offers a broad range (thousands) of products for delivery to South African customers.If one considers the EU approach to assessing potential competition in mergers (including in digital markets), it requires proper regard to evidence relating to: (1) the extent to which the merging parties already represent competitive constraints to one another, and (2) the extent to which other competitors, including global firms, are already posing a competitive constraint on South African firms, or will likely do so in future. Assessing potential entry by a non-merger party is fraught with difficulty. However, assessing the extent of existing competition by international firms in digital markets should be done carefully.

This is particularly so in circumstances where the Commission has published proposed amendments to its small merger guidelines, in terms of which the Commission would request to be informed of a wide range of small mergers in digital markets. Generally, small mergers are not subject to oversight by the Commission, but it appears that the Commission intends to take a more hands-on approach to small mergers and digital markets. When doing so, we think that a clear-eyed approach to the evidence of international competition will be fundamental.

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