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JANUARY 2007

Policy Brief

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Competition and Barriers to Entry
How do entry barriers affect competition cases? Is a precise definition of entry barriers needed? Do temporary impediments matter? Do competition agencies focus on theory or on facts? What is the difference between structural and strategic entry barriers? Is evidence ofpast entry conclusive? What are competition agencies doing to lower entry barriers? For further information For further reading Where to contact us? Introduction
Before a firm can compete in a market, it has to be able to enter it. Many markets have at least some impediments that make it more difficult for a firm to enter a market. A debate over how to define the term “barriers to entry” begandecades ago, however, and it has yet to be won. Some scholars have argued, for example, that an obstacle is not an entry barrier if incumbent firms faced it when they entered the market. Others contend that an entry barrier is anything that hinders entry and has the effect of reducing or limiting competition. A number of other definitions have been proposed, but none of them has emerged as a clearfavourite. Because the debate remains unsettled but the various definitions continue to be used as analytical tools, the possibility of confusion – and therefore of flawed competition policy – has lingered for many years. More recently, other commentators have concluded that while the debate about defining entry barriers may be intellectually interesting, it is irrelevant to competition policy. Whatmatters in actual competition cases, they argue, is not whether an impediment satisfies this or that definition but rather the more practical questions of whether, when, and to what extent entry is likely to occur. Regardless of whether there is a consensus on a definition, or even whether the definition ultimately matters, it is undeniable that the concept of entry barriers plays an important rolein a wide variety of competition matters because it is vital to the analysis of market power. Entry barriers can retard, diminish, or entirely prevent the market’s usual mechanism for checking market power: the attraction and arrival of new competitors. This Policy Brief looks at the effects of entry barriers on competition and the issues they raise for policy makers. ■

© OECD 2007

PolicyBrief
How do entry barriers affect competition cases?

COMPETITION AND BARRIERS TO ENTRY

Barriers to entry are important because they are relevant in virtually every kind of competition case other than per se offences such as participating in a hard-core cartel. It is necessary to consider entry barriers when assessing dominance, when determining whether unilateral conduct might deter newfirms from participating in a market, and when analysing the likely competitive effects of mergers, to name a few examples. If a merger will substantially increase concentration to the point where a competition agency is concerned about possible anticompetitive effects, entry barriers matter because competition will not be reduced if new firms would enter easily, quickly and significantly.Consequently, agencies seeking to block a merger will usually need to show that entry barriers make quick, significant new entry unlikely. Similarly, establishing the presence of substantial entry barriers is usually necessary to prove that a high market share translates into market power in monopolisation and abuse of dominance cases. ■

Is a precise definition of entry barriers needed?

In recentyears, several competition scholars have concluded that the debate about entry barriers should be considered irrelevant to competition policy. They argue that abstract, theoretical pondering on the definition of barriers to entry is unlikely to be very helpful in investigations and policy decisions. What matters in actual cases is not whether an impediment satisfies this or that definition of an...