If there are 7 different grocery stores in driving distance of my house and two of them merge, I've still got a choice of 6 stores so there's still reasonable competition.
If there are 3 different grocery stores and two of them merge, though? That's a different matter.
And if 1 of the remaining 2 is the zero-waste organic store that only rich people and hippies use? It might not even be providing all that much competition.
Yeah, but we're talking about 2012. Instagram was small and wasn't making any money, and feature-wise it barely resembled what it is today. Going just by US sites in 2012 Twitter, Tumblr, Snapchat, Google+, Pinterest, YouTube, and Reddit were all large competing social networks (or social network adjacent sites/apps).
Seems like in your analogy there were plenty of grocery stores left.
People forget that the Android app and the aquisition announcement came out like one week apart. The basic web version didn't come out until half a year later.
My point is it already had a solid rich, influencer-y userbase + was about to become available on more platforms. Aquisition definitely had an impact on the user growth, but the growth itself was already inevitable.
The thing that makes something a competitor is the ability to act as a substitute. That means grocery stores that are 1000 miles away don't count. For photo sharing, what makes something a viable substitute is having a sufficient network effect, so photo sharing services with hundreds of users aren't a substitute for ones with millions.
This implies that mergers between large services that have a network effect should always be prohibited, but why is that even a problem unless your goal is to thwart competition?
It would also create a useful incentive: Federated systems (like email) have a single network that spans entities. If Microsoft wants to buy Hotmail, they're not buying a separate network so you don't have to be worried about it even if they each have 25 million users as long as that's not too large a percentage of the billion people who use email. So then companies would want to participate in federated systems instead of creating silos like modern social networks do, because then they would be as strictly prohibited from doing mergers.
If there are 3 different grocery stores and two of them merge, though? That's a different matter.
And if 1 of the remaining 2 is the zero-waste organic store that only rich people and hippies use? It might not even be providing all that much competition.