Constraining Mergers

I. Introduction

The importance of potential competition as a constraint on market power has been recognized in the industrial organization literature at least since work by Bain. Subsequent economic theory has formalized the relationship between firms not currently producing in an industry and market performance, and considerable empirical evidence confirms the role of such firms. Indeed, current U.S. merger policy has elevated entry conditions to co-equal status with concentration among incumbent firms as factors determining competitive effects and likely policy: A merger or acquisition between firms in a concentrated market may well be permitted if the prospects for entry into the industry can be shown to be timely, likely, and sufficient to restore the pre-merger degree of competition. In light of this heightened recognition of the effect of potential competitors, it is ironic that under current policy a merger between an incumbent firm and the same potential competitor that imposes such a constraint is