Measuring Ease of Entry

• Author: Steven C. Salop
• Published date: 01 June 1986
• Date: 01 June 1986
• DOI: http://doi.org/10.1177/0003603X8603100214
• Subject Matter: Article

The Antitrust Bulletin/Summer 1986

Measuring ease

of

entry

BY STEVEN C. SALOP*

I.

Introduction

551

In the past 10 years, the use

of

economic concepts and economic

evidence in antitrust has become far more sophisticated. To many

practitioners, economic evidence has a limited domain.

It

means

either the calculation of a four-firm concentration index (or

Herfindahl-Hirschman index) or the use

of

multivariate regres-

sion analysis in calculating antitrust damages. However, what I

mean here is the broader and more refined use

of

empirical

relationships generally.

Empirical economic evidence has two main uses: first to

validate (or reject) theoretical assertions and, second, to measure

the likely magnitudes

of

actual or likely effects. Both

of

these

types

of

evidence have application in antitrust. Measuring actual

effects

of

actual practices is one example. Estimating the likely

effects

of

proposed practices is another. Specific examples would

include empirical evidence

of

oligopoly "plus" factors, the effects

of

price changes on quantities demanded and supplied, the

estimation

of

the likely effect of exclusionary conduct on costs

Professor

of

Economics, Georgetown University Law Center.

AUTHOR'S NOTE: This is a revised version

of

a teaching note prepared

for the GULC/CLE Program on Mergers and Joint

Ventures,

Novem-

ber 29-30, 1984. This is a preliminary statement and is part

of

a larger

ongoing project on the analysis and measurement

of

entry barriers. I

received helpful comments on an earlier draft from Jonathan Baker,

William Becker, Robert Doyle, Thomas Krattenmaker, Robert Pitojsky,

David Scheffman, Stephen Silberman, and Joseph Simons.

'& 1986 by Federal Legal Publications, Inc.

552 The antitrust bulletin

and prices, and the measurement

of

cost savings from horizontal

mergers.

The use of economic evidence to judge the likely effects

of

proposed practices has been most accepted in the area

of

merger

analysis at the Department

of

Justice and the Federal Trade

Commission.

For

those mergers and joint ventures where Second

Requests for information are made, it is now routine for poten-

tial merger partners to submit to the enforcement agency a

well-documented economic report on the industry structure and

likely effects

of

the proposed merger. These reports provide

evidence on market definition, ease of entry, industry perform-

ance, and expected efficiencies, as well as concentration indexes.

There is no reason to expect this trend to the greater use

of

economic evidence to be reversed. Regardless of which political

party is in power, it is now well recognized that precise theoretical

formulations and sophisticated marketplace evidence are key to

more accurate prediction of the likely economic effects

of

pro-

posed combinations.

Use of economic evidence is not without its controversies,

however. For example, what should be the relative weights placed

on hypothetical responses to hypothetic price changes as opposed

to actual historical responses?

If

theoretical construction of

supply curves implies that foreign firms could easily increase

imports to the United States in response to a "small, nontransi-

tory price increase," but imports have not varied much despite

large variations in exchange rates over the past five years, should

the foreign firms be included in the "antitrust market" or not?

Although it is clear

that

the future course

of

markets is the issue

at stake, historical evidence might be considered more credible

than

theoretical constructs in predicting the future, unless it is

obvious why the past would not be a good predictor.

A second area of controversy involves the choice

of

concep-

tual framework. Different theories have implications for what

data

should be collected and how they should be interpreted. For

example, the issue of what constitutes an entry barrier relevant

for antitrust analysis is a controversial one in economics, as are