Barriers to entry and exit in European competition policy

Abstract

The analysis of barriers to entry and exit is fundamental to the assessment of market power and market efftciency. A firm or firms may exercise market power for a significant period of time only if barriers to new entry exist. Thus in determining whether or not a proposed merger is against the public interest, or whether a firm (or firms) is abusing monopoly or market power in antitrust cases, analysis of entry conditions is of primary importance. One might therefore expect to see rather extensive and sophisticated analyses of entry conditions, or barriers to entry, in monopoly and merger cases that come before competition authorities in the United States, United Kingdom, or member states of the European Union (EU). One might also expect that competition authorities would have placed a great deal of emphasis and effort on achieving a coherent and consistent framework for the analysis of entry barriers in a manner that makes use of the latest thinking on the subject by industrial organization economists. However, until very recently no competition authority that we are aware of has attempted to formulate a coherent and detailed framework for the analysis of barriers to entry, despite the significant degree of effort that has been put into clarifying the related problems of market definition and the measurement of monopoly or market power.’ While clear and fairly precise statements-and indeed, guidelines or proce*This paper reports on and extends research carried out initially for the UK’s Office of Fair Trading by London Economics. We are grateful to John Vickers, who was part of that project and has contributed to much that is here, and to Z&an Biro for comments on an earlier draft. We have also benefited from the comments of Roger Van den Bergh at the 10th Annual Conference of the European Association for Law and Economics and two anonymous referees. The contents of this paper, however, are the sole responsibility of the authors.