Should competition authorities lower the threshold for intervening against digital mergers to stop so called ‘killer acquisitions’? Yes, say some, because there are deals flying under the radar right now that could be snuffing out future dominance-busters before they have a chance to get traction. Not so fast.

Here’s a story: it’s India, and British colonial rulers in Delhi have become concerned about the number of venomous snake attacks. They offer up a reward for every dead cobra. A simple, if deadly, problem addressed with a simple policy solution. With one catch: enterprising Delhiites start breeding cobras to take advantage of the reward. So even more cobras. This “cobra effect”, as it was described by Freakonomics’ Stephen Dubner, is a stark illustration the law of unintended consequences as it applies to government policy.

India’s colonial rulers had a problem – other than the rather more important problem that they shouldn’t have been there in the first place – that they were a couple of hundred years too early to listen to Nobel prize winning economist Robert Lucas. Understanding what is now known as the “Lucas Critique” would have saved them from serpentine disaster. Here’s how Lucas himself described it, in a typically snappy academic economist way:

“Given that the structure of an econometric model consists of optimal decision rules of economic agents, and that optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker, it follows that any change in policy will systematically alter the structure of econometric models.”

 Lol, he was great at parties too.

Lucas’ point was actually a simple one. Behaviour is not fixed. It responds to the policy rules of the day. If you change your policy you will change behaviour. So there is simply no point trying to design policies around current behaviour: you need to think about how people will behave under the new rules. Incentives matter. Pay for cobras and people will start breeding cobras.

What has all this got to do with killer acquisitions? Well, policy makers are all about killing more cobras right now. We should, some think, be putting a stop to mergers even when we can’t be sure that they are anti-competitive (a lower intervention threshold) or perhaps even whenever we can’t be sure that they are definitely pro-competitive (reversal of the burden of proof). I don’t want to get into the debate about how serious the problem with killer acquisitions is – there are arguments on both sides that have been debated a lot already. I want instead to make a point about good policy making and the Lucas Critique.

Whatever you think about killer acquisitions, there are undoubtedly huge spillovers and complementarities in the digital economy. Whether that is between search and maps, between social networking and photo sharing, or between online book-retail and online retailing of everything-you-could-ever-think-of-wanting-delivered-next-day-cheers-Jeff. This means big tech firms will always be on the lookout for acquisitions, and there will always be big benefits in letting those acquisitions happen when they create big spillovers.

And guess what: tech firms can afford lawyers (maybe even economists), so they know what the rules are. If you change your policy you will change behaviour. Change the merger rules and competition authorities won’t just be looking at the same mergers under new rules. They will be looking at new mergers under new rules. Firms will still be on the lookout for complementary new ideas, and they will always think about how to get hold of those ideas without falling foul of the merger rules.

The idea of killer acquisitions started in pharma, where research has shown that anti-competitive acquisitions clustered at a level just below the merger intervention threshold. No big surprise. And it’s only rational to expect that any lowering of the merger thresholds in the digital economy will have the same effect: acquisitions will need to happen even earlier in the start-up lifecycle in order to avoid the merger process.

And here’s the rub: the reason we are having this debate in the first place is that – in the early life of a tech start-up – it’s not yet clear whether it is a complement to, or a potential substitute for, the big incumbent. Some now say Instagram was a future rival to Facebook, but the OFT at the time only saw a complementary service. It’s not so easy, and often only time will tell. If a rational reaction to tighter merger rules is to do acquisitions even earlier (when there is even more uncertainty) then we can expect to see two things:

– even more acquisitions – uncertainty means the need to hedge bets even before it becomes clear whether or not there are big spillover benefits;

– even more potential for killer acquisitions – because firms might (unknowingly even) end up buying their future potential rivals in the mistaken hope that they will turn out to be complementary assets.

And the pressure on start-ups to sell out early would be greater than ever: leave it too long and you might find that every potential buyer of your great idea has been off-sided by cautious merger control rules. Or other words, Silicon Valley would actively start breeding more cobras.

So to those thinking of changing the rules, be careful what you wish for.

Of course, this is where the “ultras” in this debate might start calling for something closer to an all-out moratorium on digital acquisitions. But that really is to deny the obvious: digital services are highly complementary and preventing firms from making the most of those complementarities would stop the digital revolution in its tracks.