Modeling the Ease of Entry in Merger Analysis: Can Financial Analysis Move the Ball?

41 Pages Posted: 22 Mar 2014  

Malcolm B. Coate

U.S. Federal Trade Commission (FTC)

Arthur J. DelBuono

Government of the United States of America - Federal Trade Commission

Date Written: March 20, 2014

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.

Keywords: Entry, Mergers, Net Present Value, Investment, Merger Guidelines

JEL Classification: K21, L40

Suggested Citation

Coate, Malcolm B. and DelBuono, Arthur J., Modeling the Ease of Entry in Merger Analysis: Can Financial Analysis Move the Ball? (March 20, 2014). Available at SSRN: https://ssrn.com/abstract=2412202 or http://dx.doi.org/10.2139/ssrn.2412202

Malcolm B. Coate (Contact Author)

U.S. Federal Trade Commission (FTC) ( email )

601 Pennsylvania Avenue, NW
Washington, DC 20580
United States

Arthur Joseph DelBuono

Government of the United States of America - Federal Trade Commission ( email )

600 Pennsylvania Ave., NW
Washington, DC 20580
United States

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