Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Wednesday, April 18, 2007

Reforming Entry Analysis in Merger Cases

Posted by D. Daniel Sokol

Last Friday I attended the very good annual Loyola Chicago Institute for Consumer Antitrust Studies conference that Spencer Waller puts together.  Among the papers presented was one by John Kirkwood of Seattle University - School of Law and Richard Zerbe of the University of Washington - Daniel J. Evans School of Public Affairs entitled Reforming Entry Analysis in Merger Cases.

ABSTRACT: Entry analysis is a critical, yet often poorly executed component of the antitrust evaluation of a merger. While a merger cannot create market power if entry is easy, courts generally evaluate the ease of entry without asking the right economic questions. The 1992 Merger Guidelines identified the three components of entry analysis - timeliness, likelihood, and sufficiency - but courts typically resolve the most difficult  issue - likelihood - in a few paragraphs, asking whether the relevant market has entry barriers but not whether those barriers are high enough to render entry unprofitable. This paper examines every litigated federal merger case since April 1992 and finds, for example, that courts never determined the minimum volume of sales an entrant would need to be profitable and rarely examined whether the reactions of incumbent firms would prevent the entrant from attaining that volume. In order to focus the courts on the right issues and provide them with better evidence to resolve those issues, this paper proposes a new approach to entry analysis. Under it, the government would have the burden of showing not only that the relevant market has barriers but also that the barriers are high enough to make entry unprofitable. If defendants contend that entry is likely, they would have the burden of demonstrating a "path to profitability" - a business strategy and financial plan that is likely to enable an entrant to both make money and promptly eliminate the merger's anticompetitive effects. This approach would improve the quality of entry analysis while maintaining its workability.

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