Antitrust Time Travel: Entry & Potential Competition

• Author: Sean P. Sullivan & Henry C. Su
• Position: Professor of Law at the University of Iowa College of Law and a Senior Editor of the Antitrust Law Journal/Member of the California, District of Columbia, and Virginia Bars
• Pages: 147-193

ANTITRUST TIME TRAVEL:

ENTRY & POTENTIAL COMPETITION

S

EAN

P. S

ULLIVAN

& H

ENRY

C. S

U

*

How should claims of future entry, or its prevention, be addressed? To seri-

ously engage with these claims, one must be prepared to undertake what we

call analytical time travel: drawing connections between competition in the

past, present, and future through evidence, inference, and educated guess-

work. Modest attempts at time travel are familiar in antitrust. Some, like the

inference of a firm’s competitive significance from its market share, assume

connections between past, present, and future competition.

1

Others, like the

evaluation of challenges to mergers under Section 7 of the Clayton Act, as-

sume connections between present and future competition.

2

But nowhere are

the demands of time travel more explicit, the tasks more challenging, or the

consequences more critical, than in the related doctrines of (1) the defense of

* Sullivan is a Professor of Law at the University of Iowa College of Law and a Senior Editor

of the Antitrust Law Journal. Su is a member of the California, District of Columbia, and Vir-

ginia Bars. This article reflects our views. It does not claim to represent the views of our employ-

ers, or of any institutions with which we are affiliated, or of any of our clients. We benefitted

from the comments of Erika Douglas, Eleanor Fox, Herb Hovenkamp, Christopher Leslie, Barak

Orbach, Douglas Rathbun, and student participants at the November 2022 Antitrust Scholars

Roundtable at the University of California, Irvine School of Law. We thank Kassandra DiPietro,

Cassandra Ehly, and Maya Sanaba for their research assistance. And we thank the Law Library at

the University of Iowa College of Law for help in collecting sources for this work. Correspon-

dence may be addressed to Sullivan at sean-sullivan@uiowa.edu.

1

See, e.g., United States v. Gen. Dynamics Corp., 415 U.S. 486, 501 (1974) (“Evidence of

the amount of annual sales is relevant as a prediction of future competitive strength, since in

most markets distribution systems and brand recognition are such significant factors that one

may reasonably suppose that a company which has attracted a given number of sales will retain

that competitive strength.”).

2

E.g., Brown Shoe Co. v. United States, 370 U.S. 294, 332 (1962) (“[T]he very wording of

§ 7 requires a prognosis of the probable future effect of the merger.”) (emphasis omitted); United

States v. Phila. Nat’l Bank, 374 U.S. 321, 362 (1963) (“[T]he ultimate question under §7

[whether the effect of a merger would be substantially to lessen competition] . . . requires not

merely an appraisal of the immediate impact of the merger upon competition, but a prediction of

its impact upon competitive conditions in the future.”).

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easy entry to counter claimed anticompetitive effects and (2) the offense of

anticompetitively acquiring a potential competitor.

3

The time travel metaphor can be best understood by recognizing that anti-

trust law is concerned with protecting competition in the present, the future, or

both. We cannot do anything about competition in the past, but it can help us

to understand competition in the present and to predict competition in the

future. Likewise, our understanding of competition in the present can help to

predict competition in the future. Finally, predictions about competition in the

future can affect our view of competition in the present—a point as true for

firms making price and investment decisions as it is for tribunals tasked with

evaluating antitrust challenges. Analytical time travel can thus involve for-

ward time travel (using past and present conditions to describe the properties

of future competition) or backward time travel (using predictions about future

competition to describe the properties of present competition).

Time travel labels help to separate and connect entry and potential competi-

tion concepts. The “actual potential competition” offense and what we call the

“corrective entry” defense involve predictions about the future competitive

significance of rivalries not in existence at the time of evaluation. This is

forward time travel. These inquiries consider competitors that do not yet exist

and how those competitors will impact competition that has yet to occur. The

“perceived potential competition” offense and what we call the “preventative

entry” defense involve a backward-leaping assessment of how the threat of

future rivalry influences competitive behavior today. This is backward time

travel. It is as if the future entrants are traveling backward through time to

exert their competitive influence upon current market participants.

We use these time travel labels to introduce a helpful way of understanding

entry and potential competition arguments. While entry and potential competi-

tion theories will probably always be contentious,

4

complicated,

5

and paradox-

ical,

6

these features are exacerbated by a tendency of courts to describe these

theories briefly, without delving into details of what is being claimed to hap-

pen and why. Current doctrines are also needlessly burdened by artificial bi-

furcation of related concepts. Ripped apart and stuffed into separate silos of

3

While our primary interest is the potential illegality of acquisitions involving potential com-

petitors under Section 7 of the Clayton Act, the following applies in analogous ways to Sherman

Act, Sections 1 and 2 offenses concerning acquisition and exclusion of potential competitors.

4

Cf. Jonathan B. Baker, Responding to Developments in Economics and the Courts: Entry in

the Merger Guidelines, 71 A

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L.J. 189, 190 (2003) (commenting that “[n]owhere in [the

process of drafting the 1992 merger guidelines] were the problems of steering between the de-

mands of precedent and economic logic more difficult than in writing the section on entry”).

5

See infra Part II.

6

See infra Part III.

2023]

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analysis,

7

entry and potential competition theories have evolved in some pecu-

liar ways—and have failed to evolve at all in others.

8

The thesis of this Article

is that a clearer, more accurate, and more administrable understanding of en-

try and potential competition analysis emerges from viewing these theories

not as siloed doctrines but as related facets of the same underlying exercise in

analytical time travel.

This is, in fact, how both theories got their start. Part I demonstrates this in

a brief correction of the historical record on entry and potential competition.

In contrast to modern practice, early struggles to understand the relevance of

“potential competition” did not fixate on separating the harm that might flow

out of effects on potential competition from the palliative effects that potential

competition had for current or future competition. True, much of the current

doctrine in this area developed only after potential competition theories were

separated into those involving harms and those involving benefits. But it is

hard to see where the modern approach is superior to the earlier, more fluid,

approach—and there are obvious respects in which it is inferior.

Motivated by skepticism about current practice, Part II reconstructs the en-

try defense and potential competition offense from the unified perspective that

both involve the same exercise in antitrust time travel. Relying on nothing but

modern economic models of entry, this reconstruction reveals helpful insights.

It highlights, for example, the importance of considering strategic responses to

potential entry when evaluating all time travel theories—entry defenses and

potential competition offenses alike. It also unearths traps that have ensnared

this area of law for decades, such as immaterial philosophical arguments

about what counts as a barrier to entry. In short, the time travel perspective

clarifies the common requirements and complexities that undergird both entry

and potential competition theories.

Part III exploits this clear-eyed vantage point to survey some paradoxes of

analytical time travel in antitrust. Some of these are artificial, as where doctri-

7

Compare U.S. D

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& F

ED

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, H

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M

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§ 1 (2010), ftc.gov/os/2010/08/100819hmg.pdf [hereinafter 2010 H

ORIZONTAL

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UIDELINES

] (referencing federal antitrust enforcement practices with respect to “mergers and

acquisitions involving actual or potential competitors”), with id. § 9 (describing circumstances in

which potential entry would “alleviate concerns about adverse competitive effects”); cf. United

States v. Waste Mgmt., Inc., 743 F.2d 976, 982 (2d Cir. 1984) (recognizing that “[t]he Supreme

Court has never directly held that ease of entry may rebut a showing of prima facie illegality

under Philadelphia National Bank” but inferring that such a defense is implied by the Court’s

emphasis of injury to potential competition as a possible violation).

8

In another article in this issue, Louis Kaplow offers a similarly negative review of the state

of entry analysis in merger review. See Louis Kaplow, Entry and Merger Analysis,supra this

issue, 85 A

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L.J. 103, 103 (2023) (commenting that “entry is usually an afterthought in

merger analysis,” that “standard [entry] inquiries are circumscribed,” and that this analysis inade-

quately incorporates modern economics).