Assessing Potential Competition in Antitrust Markets

Antitrust guidelines of the major jurisdictions, to a greater or lesser degree of detail, comment on the likelihood of entry, various factors and barriers that determine entry conditions, and the assessment of actual and potential competition. I note that the treatment of potential competition, and the sunk costs that determine the parameters of such competition, are somewhat under-emphasized. Part of this is probably due to the complexities of assessing the different types of sunk costs, as well as meaningful quantification of the constructs. In this paper, I use the Baumol, Panzar and Willig (1982) contestable markets framework as a guidepost to elaborate on sunk costs and potential competition, and evaluate specific measures of sunk costs. The measures of sunk costs I elaborate, related to entry physical-capital requirements, on are designed to reveal the underlying structural conditions in the market. To complement this approach, I use the Landes and Posner (1981) framework to spell out a methodology that would rely on using market or industry specific time-series data to assess the likelihood and extent of potential competition. While the specifics of sunk costs are to be determined on a market and industry specific basis, this paper provides a set of alternatives that can be used by economists and attorneys in antitrust agencies to assess entry conditions and potential competition. The paper briefly comments on the proposed mergers between Staples and Office Depot (1996) and Volvo and Scania (2000), with an eye towards examining the entry conditions and assessment of potential competition in those markets