Tuesday, May 27, 2014
Malcolm B. Coate, U.S. Federal Trade Commission (FTC) and Arthur J. DelBuono, Federal Trade Commission ask Modeling the Ease of Entry in Merger Analysis: Can Financial Analysis Move the Ball?
ABSTRACT: In merger analysis, ease of entry, when present, trumps competitive concerns and allows market behavior, such as a merger, to proceed unchallenged. Thus, entry plays a key role in every antitrust study. That said, it is surprising that entry analysis is inconsistently defined, both in the courts and at the Agencies. Research suggests that the key problem revolves around the analysis of the likelihood of entry. This paper addresses the likelihood problem head-on, suggesting the question be addressed with a discounted cash flow analysis of a hypothetical entry designed to deter or defeat the potential anticompetitive effects caused by the merger. We present a comprehensive discounted cash flow model and broaden the analysis to evaluate the major risks of the project. We also discuss how to evaluate the results of the model and discuss various objections to and limitations of the modeling technique. Our approach provides antitrust practitioners and even business managers with a useful tool to aid in the evaluation of the likelihood of entry in the context of a merger.