Economic and Antitrust Barriers to Entry
R. Preston McAfee, Hugo M. Mialon, and Michael A. Williams1
December 1, 2003
We review the extensive literature on barriers to entry in law and economics; we introduce four concepts, namely economic, antitrust, primary, and ancillary barriers to entry; we employ these concepts to classify a set of well-known structural characteristics of markets and competitive tactics by incumbents; and we apply the resulting insights to evaluate the verdicts that were reached in a set of landmark antitrust court cases in the US.
Bain (1956) defined an entry barrier as anything that allows incumbent firms to earn above-normal profits without the threat of entry. To defend his contention that large scale economies are an entry barrier, Bain argued that if incumbents act in concert and potential entrants expect incumbents to maintain their pre-entry output levels after entry has occurred, the necessity for firms to be large relative to the market in order to attain productive efficiency allows incumbents to earn above-normal profits without the threat of entry. However, incumbents may find that their interests are best served by reducing their output levels once large scale entry has occurred, so that Bain's assumption that potential entrants expect incumbents to maintain their pre-entry output levels may not be realistic.
Moreover, Stigler (1968) rejected the basic notion that scale economies can create an entry barrier. He defined entry barriers as costs that must be borne by a firm that seeks to enter an industry but is not borne by firms already in the industry. In any given industry, entrants and incumbents alike enjoy the same scale economies as they expand their output. Therefore, according to Stigler's definition, scale economies are not an entry barrier. With respect to scale economies, and other market characteristics, the definitions of Bain and Stigler are at variance, which has resulted in much controversy among economists and antitrust lawyers over the definition of an entry barrier. The purpose of this article is to clear up this confusion by providing a thorough classification of entry barriers. In section 1, we trace the historical development, in economics and law, of the existing disarray of definitions of a barrier to entry. In section 1 Preston McAfee and Hugo Mialon, Department of Economics, University of Texas at Austin, Austin, Texas, 78712 (firstname.lastname@example.org and email@example.com), Michael Williams, Analysis Group, Inc., PM KeyPoint LLC, 2200 Powell Street, Suite 1080, Emeryville, CA 94608 (firstname.lastname@example.org).
2, we introduce four concepts, namely economic, antirust, primary, and ancillary barriers to entry, and classify a group of well-known structural characteristics of markets and competitive tactics by incumbents accordingly. This classification is original, and clears up most of the confusion highlighted in section 1. In section 3, we consider a set of antitrust court cases for which the new classification can be employed to evaluate the verdicts that were reached. Section 4 summarizes and proposes avenues for further research.
I. HISTORY OF THE CONCEPT
Many economists and legal scholars have attempted to define the concept of a barrier to entry, and this has produced a medley of definitions, several of which address different issues, and several of which clash. We begin by presenting, in chronological order, the definitions that have been proposed in the economics literature. I.A. ECONOMICS
Historically, the most common impediments to free entry into markets have been government monopoly grants and patents. Many governments have granted monopolies for the exclusive purpose of collecting government revenue. An example is the salt gabelle in China. At the turn of the century, the right to manufacture, transport, and sell salt was under strict governmental control; the salt gabelle...