Entry and repositioning

Entry and repositioning (2023 Merger Guideline 3.2): one of the strongest ways for D to rebut P’s prima facie case in the case of a horizontal merger

Entry considers whether a firm that is not part of the market at the start of the prima facie case will decide to enter given the conditions that would exist after it entered

Repositioning: change in products offered

Entry and repositioning can rebut the presumption that a merger will lessen competition

Entry must be timely, likely, and sufficient

• Timeliness: must be fast and durable

Entry must counteract any loss in competition before it occurs: actual or threatened entry must deter anticompetitive effects

Entry must be durable: firm is not merely entering to take advantage of a temporary price increase

• Likelihood: must be certain

Entry must be so likely that no substantial loss of competition occurs

Market participants: those who are in or would enter the market based on the pre-entry price

• Firms already in the market
• Firms that would enter in response to a SSNIP (“hit and run” entrants)

Entrants decide to enter based on post-entry conditions

• Entrant must evaluate whether it is profitable for them to be in the market after they’ve entered and likely lowered the price relative to the pre-entry level
• If entrant expects prices to fall as a result of entry, they are less likely to enter (and vice versa)
• E.g.: Baker Hughes, firms from other countries didn’t enter, there must be some reason why – likely that price post-entry would be too low

“The Agencies also assess whether the merger may increase entry barriers.”

• Sufficiency: aggregate scale of entrants must be large enough to replace one of the merging firms

Entry may not be sufficient to prevent a loss of competition

• E.g.: entering firms might be a small fraction of the market

“Entry must at least replicate the scale, strength, and durability of one of the merging parties to be considered sufficient”

• Distinctions between the prongs:

Timely and likely entry by a small number of small firms: likely not sufficient because it can’t replace the competition lost from the merger

Sufficient entry by a large firm that is (1) several years in the future (not timely) or (2) not certain (not likely) would be not credited as a rebuttal to P’s prima facie case.

Relevance of sunk costs to timing, likelihood, and sufficiency:

• Sufficiency: if sunk costs are high, an entrant may not enter at scale
• Likelihood/timing: if sunk costs are low, an firm may enter quickly with high certainty – may lead agencies to classify firm as a market participant rather than an entrant

Caselaw

• U.S. v. Waste Management

Holding: Merger allowed

• Ease of entry implies that the merger will not be anticompetitive
• Test:
  • Prima facie case from PNB can be rebutted only by demonstrating that the merger will not have anticompetitive effects
  • A substantial market share is insufficient to void a merger where that share is misleading as to future competitive effects (General Dynamics)
    • Prof. Note: this is different than usual, not just that the market definition was wrong
  • Case law/merger guidelines suggest entry may be considered in appraising whether a merger will lessen competition.
• Application of test: entry in the product and geographic market is so easy that it will negate any anticompetitive effect of the merger (as a matter of law)
  • Bidding on contracts and sunk cost: before entering the market and incurring sunk costs, a firm would first secure a contract
  • History of entry: firms outside Fort Worth have entered the Fort Worth market, indicating entry is easy
  • Incumbent reputation is not a barrier to entry: there doesn’t appear to be evidence that reputation has stopped firms in the past, and even if there is, why would that be a bad thing? The market should deliver benefits to those good at trash collection
  • Existing contracts are not barriers to entry: if it’s true that no one can compete in the market because people are locked in contracts, then no one can raise prices, so there is no anticompetitive effect – not a concern.
• Successfully rebuts P’s prima facie case

Facts: Merger of American Container Service (a subsidiary of WM) and Texas Industrial Disposal in Dallas. The market is defined as trash collection excluding single and multi-family residences and small apartment complexes in Dallas County (industrial waste disposal). Combined market share in Dallas area will be 48.8%.

Prof. Notes:

• Some judges rely on a broad interpretation of entry to permit mergers
• This is one of the strongest statements by the court outlining how D can make a rebuttal
• Note that ease of entry doesn’t defeat the prima facie case in every instance, but it does on these facts as a matter of law
• Critiques:
  • Court seems to underestimate how hard it is to enter the market: not like a mom and pop shop can start an industrial waste disposal service
  • Reputation might matter: if certain waste, like industrial chemicals, aren’t disposed of correctly the waste generator might be on the hook for tort liability
• Best argument: antitrust resources are scarce, leave it to the market to address the issue.
• U.S. v. Baker Hughes
• Holding: evidence of entry and expansion
  • Combination of factors were sufficient to rebut P’s prima facie case:
    • Past entry by two firms in 1989: past entry is the best evidence that the market might not be competitive
    • Potential entry by Canadian and other foreign firms: evidence that anticompetitive conditions would be disciplined in a timely, likely, and sufficient manner
    • Failed entry by foreign firms: attempted entry credited as evidence of entry/expansion (but could have been credited the other way)
    • Growth (expansion of existing competitors): entry + the growth in the size of entrants are significant enough to rebut
• Facts: HHUDR case
• Prof. Note:
  • Sunk costs: low like in WM because firms wouldn’t enter without first getting a contract
    • Further lowered by the fact that entering companies aren’t starting from scratch, they have lower costs
  • Note that D argues that the Canadian and Finnish firms are participants (make the market look more competitive), P argues that they are entrants (make the market look less competitive)
    • General exam note: don’t think about what’s “correct,” think about what the D would argue and what the P would argue
  • Entry is one of the strongest cases that D can make in a merger case because it appeals directly to the anticompetitive effect of the merger
• FTC v. Heinz: entry at scale into the baby food market is hard because it would require substantial advertising to overcome barriers from incumbents’ reputation and consumer perception of quality