DRAFT: February 9, 2004

**Outline of Comments re "Uncommitted Entry"**

1.  The basic approach suggested by simple intuition and many cases

    a.  Assess competition by defining the market and identifying that
        firms that sell in the market

    b.  Consider entry of other firms as a constraint on anticompetitive
        effects

2.  Some cases in 1980s eroded this approach by taking supply elasticity
    into account in defining the market

3.  Merger Guidelines refine the analysis by specifying that markets be
    defined on the basis of demand, distinguishing between "uncommitted"
    and "committed entry," and including only the former in the market.

    a.  "Uncommitted' entrants are not presently selling in the market,
        but

        i.  would enter within a year in response to a SSNIP, and

        ii. could enter without incurring "significant sunk costs"

    b.  because uncommitted entrants have no actual sales in the market,
        their shares must be calculated on the basis of capacity

4.  Practical problems with the concept of "uncommitted entry"

    a.  The idea of uncommitted entry potentially adds to the issues to
        be explored, i.e., the need to inquire whether the sunk costs
        are substantial and whether entry would take place in a one
        year, but uncommitted entrant are likely to be rare

        i.  there are almost always sunk costs, especially if
            opportunity costs are taken into account (in other words,
            the fact that a firm is not presently selling in the market
            presumably says something)

        ii. the concept probably applies only to unbranded products or
            services that can be manufactured or provided with existing
            facilities that are used for other products or services and
            can be switched with no capital investment

    b.  Analysis of the merger is not shortened, even if an uncommitted
        entrant is identified

        i.  Even if a firm is deemed to be an uncommitted entrant, not
            all of its capacity is necessarily deemed to be in the
            market; to the contrary, the Guidelines exclude from the
            market capacity that is "committed or so profitably employed
            outside the market" that it would not enter in response to a
            SSNIP; in effect, the share attributed to the uncommitted
            entrant is a prediction of its likely actual entry

        ii. The fact finder thus must make the same inquiry about both
            uncommitted entrants and committed entrants \-- how much
            would likely enter and when \-- in light of the costs of
            entry, the incentives for entry and the opportunity cost of
            entry

    c.  Not surprisingly, therefore, our experience suggests that the
        notion of uncommitted entry neither streamlines the process nor
        enhances the analysis

        i.  merger analysis starts with assessment of candidate market
            and estimation of shares and HHIs based on firms presently
            selling in market

        ii. then, the analysis shifts to whether prospect of entry
            ameliorates competitve concerns

        iii. categorization of potential entrants as uncommitted or
             committed does not

> shortcut this process

iv. nor does it materially affect the substantive analysis

    1.  if merger outcomes turned largely on HHIs, the exercise of
        determining whether an entrant should be taken into account in
        that calculation (i.e., refining the HHI estimate) might be
        valuable

    2.  but HHIs are only a starting point in an inquiry that is
        ultimately aimed at analyzing the likely competitive effects;
        indeed, recent DOJ/FTC data suggest that HHIs have limited
        utility in predicting enforcement decisions

    3.  although the discussion in the Guidelines of uncommitted entry
        usefully directs attention to issues of sunk costs and the
        timing of entry, the uncommitted/committed dichotomy adds little
        to the competitive effects analysis

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5.  Theoretical problems with the concept of "uncommitted entry"

    a.  Any effort to put facts into one category or another runs the
        risk of inducing a focus on category criteria (and resulting
        exegesis and lore) that comes to have little relation to the
        substantive purpose initially sought to be served by the
        categories

    b.  The concept suggests a false dichotomy, or at least excessive
        formalism, in the distinction between uncommitted and committed
        entry, when they are inevitably just points on a continuum

    c.  Problems regarding calculation of shares

        i.  The reason for including uncommitted entrants in the market
            is to refine the assessment of competition in the market
            prior to the merger; market shares and HHIs are central to
            this assessment

        ii. The Guidelines set forth criteria for determining best basis
            for calculating shares

            1.  Because they have no sales in the market, uncommited
                entrants' shares must be measured by capacity

            2.  But capacity is optimal measure of shares of firms
                actually selling in the market only under certain rather
                uncommon circumstances

        iii. Therefore, inclusion of uncommitted entrants will often
             undermine assessment of market concentration as a starting
             point for analysis by either including firms whose shares
             are not comparable to the others' or by forcing use of
             suboptimal measures of market shares

    d.  The distinction between committed and uncommitted entry does not
        precisely reflect its purported purpose

        i.  The reason for distinguishing between firms in the market
            and those that are only potential entrants is this

            1.  Firms in the market are those that exert a present
                constraint on competition in the status quo ante or the
                premerger world; it is useful to identify those firms

                a.  in order to ascertain whether the market is
                    susceptible to competitive problems, and

                b.  in order to understand at the outset of the analysis
                    whether the merger may injure competition by
                    eliminating an existing constraint on
                    anticompetitive conduct in the market

            2.  Other firms that are potential entrants matter to the
                analysis only to the extent that they would enter (and
                thus would begin to affect) the market in response to
                competitive harm caused by the merger; they are thus
                appropriately considered at the competitive effects
                stage of the analysis

        ii. The distinction between uncommitted and committed entry is
            an interesting typology but at best a crude proxy for the
            substantive factors it is supposed to illuminate

            1.  Even a truly uncommitted entrant might not exert a
                present constraint on entry if, for example, limit
                pricing is unnecessary because entrants know that
                incumbents could promptly lower prices and retain volume
                in response to imminent entry

            2.  A committed entrant might exert a present constraint on
                competition if entry could cause a permanent shift in
                volume (e.g., leapfrog entry by new and superior motion
                picture theater)

6.  Suggested alternative to present distinction

    a.  Focus on two different material issues:

        i.  Are there potential entrants[^1] that exert a present
            competitive constraint on the market, i.e., a present
            perceived entry or "wings" effect?

        ii. What is the likelihood that new entry post-merger would
            ameliorate or prevent competitive harm from the merger?

    b.  To illuminate these issues, undertake the same basic inquiry
        regarding the likelihood of actual entry by all potential
        entrants\-- under what circumstances, at what volume and over
        what time would the firm enter? [^2]

    c.  Inquire as part of that inquiry whether the entrants exert a
        present perceived entry or "wings" effect

        i.  sunk costs are relevant to this inquiry but not necessarily
            dispositive

        ii. the competitive importance of the wings effect will probably
            reflect, e.g., the existing sellers' expectation about the
            volume of potential entry that is likely to enter; available
            capacity is a good proxy

    d.  When assessing the competitive effects of the merger, be mindful
        of whether wings effects are part of the story

        i.  determine whether wings effects are material to competition
            in the market preentry and, if so, whether the merger will
            eliminate a present competitive constraint

        ii. pre-and post-merger HHIs calculated by including wings
            effect entrants are useful, but only as one small piece of
            the analysis

[^1]: For this purpose, the term "potential entrant" includes both firms
    not presently selling in the market and capacity that is owned by
    firms selling in the market but not presently used for sales in the
    market.

[^2]: In theory, a firms could exert a wings effect even if it is not
    also a potential actual entrant. But that would be the case only if
    the incumbents in the market were persistently ignorant of the
    actual unlikelihood of entry. It is not clear that the Guidelines
    need to take this possibility seriously.