Entry Deterrence, Concentration, and Merger Policy

Likelihood of entry is considered to be a mitigating factor in the analysis of a merger's competitive effects. Entry analyses in horizontal merger investigations typically focus on the incentives and ability of potential entrants to enter the market and restore its competitiveness in the event the merger creates anti-competitive effects. There is, however, a well-developed body of research in economics – both theoretical and empirical – that explores the incentives of incumbent firms to proactively engage in entry deterrence, say, by lobbying an industry regulator to adopt rules that make entry harder. We show that the increased concentration that results from a merger can increase incumbent incentives to deter entry, making the likelihood of entry less than that predicted by only an analysis of a potential entrant's incentives and ability. Two important policy implications for merger investigations are: (i) prior entry – which is taken as an indication of ease of post-merger entry – may be of limited evidentiary value, and (ii) reduced likelihood of post-merger entry can be a competitive concern in its own right and not simply a mitigating factor with regards to traditional merger effects like increase in prices or loss of innovation