Barriers to entry

 

Author Definition

 

Definition

There are two definitions of entry barriers. The first defines them as any factor that permits firms already in a relevant market to earn higher than normal profits while simultaneously deterring others from entering and competing. An alternative definition and much narrower approach argues that the entry barrier concept should be limited to costs that a prospective market entrant must incur at the time or after the time of entry that existing market participants did not have to incur when they entered the relevant market.

Barriers to entry may be structural (business conditions) or strategic (purpose of deterring entry) and must be scrutinized from a dynamic perspective. Conditions that influence entry include sunk costs, legal and regulatory barriers, economies of scale, economies of scope, capital costs, network effects, barriers to exit, vertical integration, predatory pricing, limit pricing, fidelity rebates and bundled discounts and exclusive dealing arrangements.

 

Commentary

In 1993, in Brooke Group, Ltd. v. Brown & Williamson Tobacco Corp., the Supreme Court has unquestionably recognized the entry barrier concept and imposed it in antitrust jurisprudence. It has not provided a clear definition of barriers to entry or clearly explained how the presence or absence of such barriers affect specific antitrust claims, though.

Some lower federal courts appear to follow ideas from economic literature that may be inconsistent with the predominant precedents. In United States v. Baker Hughes Inc. the D.C. Circuit decision rejected the government’s argument that entry must be "quick and effective" to count on the ground that this requirement overlooks that potential competition, even it never resulting in actual entry, can nevertheless exert competitive pressure on the market.

The Ninth Circuit Federal Courtin Rebel Oil, a monopolization case, recognized that entry, though easy for some firms, may be insufficient to solve a competitive problem "if the market is unable to correct itself despite the entry of small rivals" and cited the Merger Guidelines "timely, likely, and sufficient" language as persuasive authority for undertaking that analysis.

The legal question involving burdens of proof is unresolved. The 1992 US Merger Guidelines disclaim allocation of burdens; they describe an analytic framework adopted by the enforcement agencies, not a legal framework that should be employed by a court. Courts applying the Philadelphia National Bank presumption of anticompetitive effect from market concentration generally address entry as a rebuttal factor, designed to respond to the government’s showing of concentration. This approach clearly places a burden of proof on the defendant.

On the other side of the Atlantic, most European rulings on dominance are determined around the existence of additional market characteristics, which either add to or detract from potential dominance. It is said that dominant positions raise “almost insuperable practical and financial obstacles” for actual and potential competitors. These characteristics have expanded through later case law and do not form a fully defined set.

On the one hand, in Continental Can, the European Court of Justice emphasized the importance of proving the possibilities of other competitors to enter the market, before ascertaining the existence of a dominant position. In other words, the ECJ stated that a causal relationship should not necessarily exist between the dominant position and its abuse, or that the causal relationship between a dominant position and its abuse is not necessary to ascertain the abuse of the dominant position.

On the other, in Hoffmann-La Roche, it provided a caveat in listing the factors (markets shares, price elasticity of demand, profitability measurement, barriers to entry, barriers to expansion, structural factors and behavioral factors) that may determine the existence of a dominant, which taken separately however, are not necessarily determinative.

In the 2012 AstraZeneca AB and AstraZeneca plc v European Commission , the European Court of Justice (ECJ) dismissed an appeal brought by AstraZeneca against a General Court ruling upholding the Commission’s decision fining AZ 60 million euros for abuse of a dominant position on the market for proton pump inhibitors (PPIs) used for gastro-intestinal diseases. The Commission found that AZ had misused pharmaceutical marketing procedures in order to exclude competition from generic alternatives to, and parallel imports of, its Losec drug.

In Brazil, the most recent case (October 2018) involving barriers to entry was Administrative Process N. 08012.007423/2006-27 where the Tribunal of the Administrative Council for Economic Defense (Cade) condemned the ice cream maker Unilever, owner of the Kibon brand, for limiting and harming free competition by preventing access by competitors to distribution channels. The case concerned points of sale (POS) in the ice cream market in the municipalities of Rio de Janeiro and São Paulo. During the investigation, there were indications that the company would have offered discounts and bonuses to the POS in exchange for exclusive sales, merchandising (privileged exposure) or the use of refrigerators. Cade also identified the existence of contractual provisions imposing the obligation of points of sale to sell a minimum quantity of products under penalty of fine and refund of the amount advanced upon signing the contract.

 

Case references

Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421 (9th Cir. 1995)

United States v. Baker Hughes Inc., 908 F. 2d. 981 (D.C. Cir. 1990)

United States v. Waste Management, Inc., 743 F.2d 976 (2d. Cir. 1984)

United Brands Company and United Brands Continentaal BV v. Commission of the European Communities - Case 27/76 (ECJ 14 February 1978), ECLI:EU:C:1978:22, para. 122-123

United States v. Philadelphia National Bank, 374 U.S. 321 (1963)

 

Bibliography

Baker, Jonathan. Responding to Developments in Economics and the Courts: Entry in the Merger Guidelines. The United States Department of Justice Archives, August 2015.

European Commission’s DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses, December 2005, paras. 34

Federal Trade Commission and U.S. Department of Justice, Antitrust Guidelines for Collaborations Among Competitors §3.35 (2000), reprinted in 4 Trade Reg. Rep. (CCH) 13,161.

Herz, Martin and Vedder, Hans. A commentary on Article 102 TFEU. In Blanke, H.-J. & Mangiameli, S. (eds.), The Treaty on the Functioning of the European Union (TFEU)

Hovenkamp, Herbert. Federal antitrust policy. The law of competition and its practice. 5th ed. Hornbook Series, West Academic Publishing, 2016, St. Paul, p. 50.

Lazaroff, Daniel. Entry Barriers and Contemporary Antitrust Litigation. 7 U.C. Davis Bus. L.J. 1 (2006).

O’Donoghue & Padilla 2013, p. 151 ff., Whish, 6th ed., p. 179 ff., and Whish and Bailey, 7th ed., p. 184 ff

OECD Policy Roundtables. Barriers to Entry. DAF/COMP(2005)42. Organization for Economic Co-operation and Development (OECD). March 2006.

Author

Quotation

Fernando de Magalhaes Furlan, Barriers to entry, Global Dictionary of Competition Law, Concurrences, Art. N° 20102

Visites 13233

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

Barriers to entry are factors which prevent or hinder companies from entering a specific market. Entry barriers may result for instance from a particular market structure (e.g. sunk cost industry, brand loyalty of consumers to existing products) or the behaviour of incumbent firms. It is important to add that governments can also be a source of entry barriers (e.g. through licensing requirements and other regulations). © European Commission

Barriers to entry are factors which prevent or deter the entry of new firms into an industry even when incumbent firms are earning excess profits. There are two broad classes of barriers: structural (or innocent) and strategic. These two classes are also often referred to as economic and behavioural barriers to entry. Structural barriers to entry arise from basic industry characteristics such as technology, costs and demand. There is some debate over what factors constitute relevant structural barriers. The widest definition, that of Joe Bain, suggests that barriers to entry arise from product differentiation, absolute cost advantages of incumbents, and economies of scale. Product differentiation creates advantages for incumbents because entrants must overcome the accumulated brand loyalty of existing products. Absolute cost advantages imply that the entrant will enter with higher unit costs at every rate of output, perhaps because of inferior technology. Scale economies restrict the number of firms which can operate at minimum costs in a market of given size. A narrower definition of structural barriers is given by George Stigler, who suggests that barriers to entry arise only when an entrant must incur costs which incumbents do not bear. This definition excludes scale economies as a barrier. There is some debate as to whether Stigler’s definition includes costs not currently being incurred by incumbents or costs which have never been incurred by incumbents. Other economists would emphasize the importance of sunk costs as a barrier to entry. Since such costs must be incurred by entrants, but have already been borne by incumbents, a barrier to entry is created. In addition, sunk costs reduce the ability to exit and thus impose extra risks on potential entrants. Strategic barriers to entry arise from the behaviour of incumbents. In particular, incumbents may act so as to heighten structural barriers or threaten to retaliate against entrants if they do enter. Such threats must, however, be credible in the sense that incumbents must have an incentive to carry them out if entry does occur. Strategic entry deterrence often involves some kind of pre-emptive behaviour by incumbents. One example is the pre-emption of facilities by which an incumbent over-invests in capacity in order to threaten a price war if entry occurs. Another would be the artificial creation of new brands and products in order to limit the possibility of imitation. This possibility remains subject to considerable debate. It should also be noted that governments can be a source of entry barriers through licensing and other regulations. (...) © OECD

 
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