Barriers to Entry

Brenton PhilpDirector, Mergers and Asset Sales Branch

Australian Competition and Consumer Commission

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Relevance

Market power is concerned with power which enables a corporation to behave independently of competition and of competitive forces in a relevant market. The primary consideration in determining market power must be taken to be whether there are barriers to entry in the relevant market … To what extent is it rational or possible for new entrants to enter the market?

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Entry

There was common ground that the existence of barriers to entry was a relevant matter to be considered. This was because of the need to understand whether one of the major record companies, if it threatened to refuse supply, would face the discipline of the erosion of the market power that it might use by a new entrant being able to come into the market in a way that was sufficiently likely, timely and sufficient in scale to undermine the market power which, absent entry, the firm might have. [emphasis added]

Australian Competition & Consumer Commission v Universal Music Australia Pty Limited [2001] FCA 1800 at 391 per Hill J.

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Entry

• Likely

• Timely

• Sufficient in scale

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Barriers

• Section 50 Trade Practices Act

• Characterisation– Legal or regulatory – Structural or technological– Strategic

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Barriers

Legal or regulatory barriers:– government regulations that limit entry such

as licensing conditions or explicit restrictions on the number of market participants,

– restrictions due to legally enforceable intellectual property rights and

– restrictions such as environmental regulations that raise the costs of entry or limit the ability for customers to switch suppliers.

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Barriers

Structural or technological barriers:– the existence of sunk costs, – capital requirements for entry, – economies of scale and scope, – the nature of demand, or – scarcity of resources (both intellectual and

physical).

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Barriers

Strategic barriers: – brand proliferation and product differentiation

(including brand loyalty and inelasticity of demand),

– incumbent reputation for retaliation against entry,

– creation of customer switching costs through contracting, or

– maintenance of excess capacity that can be deployed against new entry.

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Analysis

• ‘height’ or ‘significance’

• Barriers and time

• Risk?

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Risk

• where there is low risk to entry or expansion (for the new entrant) then that action is more than likely; where there is high risk then entry or expansion may be quite unlikely.

• strategic barriers to entry are an important consideration in assessing the risk profile of entry and therefore dynamic market conditions are also considered.

Discussion

Questions?

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Discussion

• Barriers that the incumbent also had to deal with?

• Lack of access to financial capital?

• Uncommitted entry?

• Low prices?

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Contact

Brenton Philp

Director

Mergers and Asset Sales Branch

+61 2 6243 1220

Brenton.Philp@accc.gov.au

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www.accc.gov.au