Antitrust & Competition Policy Blog

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

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Wednesday, September 12, 2007

Theory Meets Practice: Barriers to Entry in Merger Analysis

Posted by D. Daniel Sokol

Analysis of agency actions is a critical part of ensuring that antitrust agencies understand how their policies work in practice.  They also give agencies an opportunity to reflect upon their own work and whether the theoretical assumptions on which they base this work need to be updated.  In an important contribution to the literature, Malcolm Coate of the US Department of Justice Antitrust Division examines the impact of merger analysis regarding barriers to entry in Theory Meets Practice: Barriers to Entry in Merger Analysis.

ABSTRACT: Barriers to entry are a necessary, but not sufficient condition for a merger to adversely affect competition. As a barrier definition must be linked to the specific theory of competitive concern under review to be meaningful, a theoretical barrier definition is unlikely to be useful. Instead, an
operational definition of barriers to entry is required. This paper explores the operationalization of the Merger Guidelines barrier to entry concept. A review of the files observes that most matters involve multiple entry scenarios, so it is often impossible to draw strict conclusions for the individual characteristics of timeliness, likelihood or sufficiency. However, by following each entry scenario through the three-stage analysis, it is possible to identify barriers to entry in 109 of the 138 matters reviewed. Within this analysis, the timeliness consideration is generally supported by the best evidence, while the likelihood characteristic leaves the most room for improvement. A total of 55 matters exhibit evidence of recent entry and 46 files report expectations of future entry. A few files detail innovative net present value analyses to determine the profitability of entry into the market. This type of financial analysis offers the promise of a quantitative approach to likelihood analysis.

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