Rethinking the Potential Competition Doctrine

Abstract

This article argues that the potential competition doctrine should be applied to determine whether a competitor waiting the periphery of the market has a disciplining effect on competition within the market. The potential competition doctrine addresses the issue of entry into a market by a firm "waiting in the wings" or on the periphery of the market. The courts have developed and modified the doctrine for over forty years. Unfortunately, the courts have created ambiguous rules that often reach dubious results. Worse, the doctrine has now become so unwieldy that some courts have simply ignored the doctrine.

The article offers a new approach to dynamic markets where firms on the edge of the market may have an impact upon competition. We argue that our approach provides a more consistent test applicable across all types of antitrust violations. Moreover, our test is equally applicable to both offensive and defensive uses of the doctrine. Our approach also develops a test that focuses on the two critical elements of potential entry: the likelihood of actual entry and the magnitude of the competitive effect. As the certainty of actual entry declines, increasing evidence of current, ongoing effects in the market becomes necessary. We stress, however, that other factors affect the outcome of this axiom, such as whether the antitrust defendant is responsible for preventing entry. Finally, our approach to the concept of potential competition analyzes objective and subjective evidence. While courts and federal antitrust agencies have emphasized objective evidence in their analyses of these issues, we believe that relying on entirely objective evidence is undesirable.

The article is broken into five parts (excluding the introduction). In Part I, we framed the concept of potential competition as developed in the economic literature. We also spent some time discussing the development of contestable market theory. Part II surveyed the potential competition and entry cases, the federal antitrust guidelines governing the potential competition doctrine, and the cases and administrative proceedings discuss potential competition in the context of deregulating industries. We drew from the electricity, airline, telecommunications, banking, and railroad sectors for illustration. Part III began by presenting a critique of the cases, taking into account the observations of other commentators. We then laid out the approach we advocate, explaining how we address the deficiencies of the current legal regime. In Part IV, we took our approach for a test drive by presenting various hypothetical fact patterns to explain how our approach works and how it differs from the current state of the law. Finally, we concluded in Part V with a summary of our approach.

Keywords: antitrust, entry, regulated industries, contestable markets

JEL Classification: K21, K23, L1, L4, L5