Derecho

Annex 1
BARRIERS

TO ENTRY

Most competition cases have to do with market
power, and barriers to entry are necessary for
market power. In some cases market power is
created through mergers or agreements between
competitors not to compete. In others the focus
is on the abuse of preexisting market power
through, for example, restrictive vertical
arrangements and predatory pricing. Infact,
most abuses of market power are attempts to
preserve or expand market power.
Firms have market power individually or collectively when buyers do not have an adequate
choice of alternative independent suppliers. In
a free-market economy consumers may buy from
any firm and since firms can, in general, enter
any market. Thus there can never be market
power when entry is easy. As soon asone firm or
a group of firms attempts to raise prices or lower
quality (or both) from competitive levels, a new
firm can emerge to serve the market.
Not surprisingly, many cases turn on an
assessment of barriers to entry. If barriers are
high, market power is possible. If they are low,
new entrants can be counted on to restore competitive balance. This chapter provides a guide
to evaluatingbarriers to entry in competition
cases. I
Consideration of barriers to entry can
appear at two points in a competition case. The
first is at the market definition stage. If the law
dictates that relevant markets should be

defined to include potential entrants (supplyside substitution), any analysis of barriers to
entrywill be necessary to determine which firms
are in the relevantmarket. 2 For example, in a
merger of the only two firms in a country making automobile tires, makers of truck tires
might be considered to be part of the relevant
market-if they could easily switch to producing automobile tires should prices rise above
competitive levels.
More commonly, however, the analysis of
barriers to entry appears after the market has
been defined. The question is: Howlikely is it
that new entry would control uncompetitive
behavior in the market? Even a firm with a large
market share will have limited market power if
a new company enters the market following any
3
attempt to raise prices above competitive levels.
A merger, even if it builds a firm with a large
share, cannot lead to higher prices if such prices
would attract new entrants. Even in cases inwhich barriers to entry are not technically
required to justify antitrust action, analysis of
barriers can be useful to screen out cases with
few anticompetitive consequences. For example,
the approach tc predatory pricing adopted in the
Canadian Competition Bureau's guidelines
suggests that the bureau will investigate
whether such pricing could wcirk in the market
in question.4 Predatorypricing is unlikely to be
successful if attempts to recoup losses from a

This annex was prepared by Thomas Ross,with input and materials suppliedby various team members.

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A FRAMEWORK OR THE DESIGNAND IMPLEMENTATION F COMPETITIONLAWAND POLICY
F
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price war are frustrated by the entry of new
firms (or even reentry of the victim).
Any analysis of barriers to entryinvolvestwo
basic steps. First, the most likelyentrants are identified. These could be firms in the same industry
in other areas; firms in the same area but in adifferent (but maybe related) industry,upstream (supplier) or downstream (customer) firms vertically
integrating either formally or through a strategic
alliance withanother firm, or firms new to the market. Barriers to entry, however,reallymean significant impediments to firms thought most likelyto
enter. Other firms might face different barriers.5
The secondstep is evaluating the magnitude of the
barriers facing potential entrants.
DEFINITIONS

Discussion of barriers to entry is complicated by
disagreements over a correct definition. 6 The
term barriersgenerally refers to conditions or
behaviors that restrict the...