Entry as a Source of Post-Merger Price Discipline

Posted by D. Daniel Sokol

Elizabeth M. Bailey (NERA) explains Entry as a Source of Post-Merger Price Discipline.
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ABSTRACT: Entry—including the threat of entry—is a market dynamic that is critical in evaluating the competitive impact of a proposed transaction. What matters in such an analysis is easy to articulate—the new entry must occur reasonably quickly, be profitable for the entrant, and sufficient to return or keep pricing at pre-merger levels. However, demonstrating empirically that entry would or would not prevent the merged entity from raising prices is a challenging task. This article describes a practical, empirical approach to the analysis of entry. The approach that she describes involves a careful review of the time and cost that it would take for entry to occur, an analysis of a potential entrant’s upfront investment costs and future revenue stream, and an assessment of the scale of entry that would be needed to return or keep pricing at pre-merger levels. All three dimensions of entry—the time it would take, the expected profits, and scale—are related, and an economically consistent analysis integrates all three elements simultaneously.