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.

Keywords: mergers, antitrust, competition policy, barriers to entry, Federal Trade Commission

JEL Classification: K21, l40