Ryanair, Aer Lingus and Barriers to Entry: Is the Merger the Problem or Just the Entities Involved? a Detailed Analysis from and Economic Perspective

Topics: Barriers to entry, Aer Lingus, European Union Pages: 16 (5572 words) Published: March 26, 2013
The purpose of this essay is not to determine whether or not, were the merger to go ahead, would it significantly lower competition (slc), as without new players entering the game this is somewhat inevitable. Our concern is whether any entrant that has the capacity to counterbalance this reduced competition in the market is significantly deterred from entering due to the existance of barriers. In determining this it must be proven that entry is not only possible but likely (European Union, 2004). One must not get too bogged down in proving that entrants can enter a market as this information is rather trivial. Competition policy must comprehend the perspective of the potential entrant in which case it does not matter if they could enter, but whether or not they would. The likelihood of entry is based on profitability in a post-merger scenario (Masey, 2008). In turn the profitability of entering the market is determined by a number of factors including barriers to entry which are relevant to this case, not because they enable incumbents to make excess profits but because they reduce entrant profitability.

Once proven likely the entity must prove that an entrant would be able to enter the market in a timely fashion in order to pose a genine threat to the incumbent firm (European Union, 2004). If there is too great a time lag the merged entity may benefit from anti-competitive behaviour (such as setting prices above a competitive level) for long enough to create a lasting negative effect before the competitor enters the market. As long as the returns on engaging in such activity are high enough to cover any switching costs and opportunity costs forgone, the trade-off faced by the incumbent favors anti-competitive behaviour, if even only in the short-run, and the threat of potential entry will not have the required restraining affect. This point is reiterrated by McAfee et al. in their paper entitled ‘When are Sunk Costs Barriers to Entry?’, saying, ‘Entrants might take so long to achieve market significance that the merger nonetheless produces sustained anti-competitive affects’ (2004).

Having met the two previous criteria it must then be proven that, even if the firm manages to successfully enter the market, the competition they provide will be sufficient to actually exert a constraint on the merged entity, the same as or at least close to that currently exerted on the proposed merging entities by each other (European Union, 2004). In the case of this merger in particular this is where the greatest challenge lies for the merging parties as the commission finds them to be eachothers ‘closest competitors’(European Union, 2007) and are in fact, on many of the overlapping routes, eachothers only competitors. Identifying a potential entrant with the scope of bearing any constraint on the merged entity seeems unlikely in which case the Commission is within its rights to block the proposal. If potential entrants do not meet all three of the aforementioned criteria the merger will not be passed.

In order to truly understand the subject of barriers to entry we must first refer to the surrounding economic theory from which we can then draw our own conclusions. Essentially there are two central and contradicting schools of thought pioneered by Joe S. Bain and George J. Stigler respectively. In his 1956 book entitled ‘Barriers to New Competition’, Bain defines barriers to entry as ‘the set of technology or product conditions that allow incumbent firms to earn economic profits in the long run’ and identifies three main causes of such barriers, namely; Economies of scale, Product diferentiation and Absolute cost advantages. While it is evident that Bain is emphasizing the ability of the incumbent to earn excess profits, Stigler, in contrast, focuses more on the entrant’s perspective defining a barrier as ‘a cost of producing..which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the...
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