Wednesday, September 20, 2017
Malcolm B. Coate and Arthur J. Del Buono ask Modelling the ease of entry in merger analysis: can financial analysis move the ball?
ABSTRACT: In competition policy, ease of entry, when present, generally trumps competitive concerns and allows market behaviour, such as a merger, to proceed unchallenged. Thus, the entry issue plays a role in every antitrust study. That said, it is surprising that entry analysis is inconsistently defined, both in the US courts and at the Agencies. Research suggests that the key problem revolves around the analysis of the likelihood of entry. This article addresses the likelihood problem head-on, suggesting that this question be addressed with a discounted cash flow analysis to assess the profitability of a hypothetical entry able 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 modelling technique. Our methodology provides practitioners with an innovative approach to evaluate the profitability and thus the likelihood of entry in an antitrust analysis.