Development of Robot Lawnmowers Will Be Delayed Thanks to New Antitrust Ruling

Mergers and acquisitions often facilitate faster product innovation. So why are governments prohibiting them?

A merger between Amazon and robotic vacuum producer, iRobot, was terminated recently after the European Commission failed to approve the deal. Immediately following the deal’s termination, iRobot announced it would be laying off roughly 31 percent of its workforce and ending research into new household products. The European Commission’s reasoning for rejecting the merger is laughably bad, and it will cost the consumer the welfare that comes from innovation.

Though not the first time the European Commission has halted a useful merger, this case serves as one of the most clear-cut examples of runaway antitrust regulators harming consumers. To support its decision, the commission argued that Amazon possessed the power to foreclose other vacuum competitors operating in the marketplace.

The main problem is that Amazon did not have the incentive to foreclose iRobot’s rivals, at least not one stronger than their incentive to maintain competition in the marketplace. iRobot’s rivals, which utilize Amazon, still provide financial value for the company, and delisting them would come at a significant financial cost. Furthermore, Amazon has a reputation to maintain which would be tarnished through the foreclosing of rival brands. Reputational harm was accepted as a legitimate disincentive from foreclosure in Fed. Trade Comm’n v. Microsoft Corp. But it doesn’t appear that the same argument is acceptable to the European Commission, and the FTC also denies this argument’s acceptability in their Merger Guidelines, despite court endorsement.

Europe is not unique in this hostile approach to tech mergers. In late January, Federal Trade Commission (FTC) staff met with Amazon to inform the company that the Commission would file a lawsuit against the merger. However, the FTC likely knew the European decision was coming since the European Commission admitted to working with the FTC during their investigation into Amazon and iRobot. Though speculation, the timing seems to be more than a coincidence.

In lieu of a consummated merger, iRobot will be changing its focus to more marginal improvements, reducing its research and development (R&D) expenses, and pausing all “non-floorcare” products like its experimental robotic lawnmowers. A firm that could have spent years developing new technology to help automate household chores will now need to cut back and focus on just getting by.

This is a tragedy for the public, as any of these automated advancements could have helped save people time. That’s time that could have been spent seeing family, developing new skills, or engaging in leisure activities. Once valued at $1.7 billion, iRobot is now worth less than $400 million, a loss that will be felt by consumers.

Joseph Schumpeter once said that the great achievement of capitalism was not found in the creation of theoretically “perfectly competitive” markets but in the “perennial gale of creative destruction.” When entire industries, or in this case modes of operating around the house, are made obsolete through innovation, that is what truly benefits society. Amazon has been a pillar of this kind of innovation, and its acquisition of iRobot would have likely carried over these achievements into the home automation space.

A study on the relationship between innovation and acquisitions found that firms are willing to pay more to acquire other innovative firms, and post-merger, R&D spending goes up across the market, including among rivals. The increase in R&D is the driver behind the next wave of creative destruction. Firms expect that the merger will lead to innovative success, and thus react by funding their innovative departments more. Ultimately, this race to develop novel products and services is what will truly change our lives for the better.

If the European Commission and the FTC truly want to maximize the welfare of consumers (which the FTC may not even desire anymore) then they would allow transactions that have the greatest chance of boosting innovation.