Industries vary in the degree to which they have this kind of competition and in its timing. Some have a threat of entry which is present much or all of the time. Others, the more Schumpeterian ones, have a pattern like we saw in the operating system market, with intermittent threats of epochal entry and new competition. Still others have intermittent threats of entry that shifts out supply (possibly by increasing product variety) to a lesser but still valuable extent.

When competition from entrants is intermittent but important, policy should treat the loss of competition from entrants as a genuine loss of competition.

#### 4. a.1) Mergers with entrants

Sometimes, an existing firm seeks to merge with a potential entrant. Merger analysis is fundamentally forward-looking. When will merger with a potential entrant reduce competition going forward? When that entrant represents a substantial portion of the expected competitive capability of the industry at some time in the future. If there are a large number of equally capable entrants, no individual entrant can play that role.

This can arise in a number of contexts. The potential entrant may be an overseas firm that has not yet sold (m)any units domestically. Will their full scale entry represent a valuable increase in competition in the domestic market? The logical answer is, if there is market power in the domestic market and the overseas entry represents a substantial increase in supply.

Suppose, for example, adapting the overseas product or service to the domestic market is not obvious or simple. Then entry calls for real innovation, innovation of a marketing type. The costs and uncertainty of that innovation mean that successful large scale entry is likely to be intermittent. Of course, if it succeeds, it may be competitively important, perhaps by changing the range of products or business models in the domestic market. Then, when an overseas firm with a successful (overseas) product or service attempts to enter, it represents an important fraction of future domestic competitive capacity. Of course, the overseas product or service is untested in the domestic market. These are circumstances in which a market test is highly valuable.

A similar situation arises when the potential entrant is the inventor of a new technology. An existing firm seeks to merge with them. Suppose that the new technology is better, or at least there is a probability that it is better for many customers. Yet the entrant has not yet done the hard work of building a distribution system, refining and improving the product for a mass market (or for many distinct customers) and so on. The market importance of the product has not yet been tested.

When should we treat such merger with such an innovative entrant as involving a substantial loss of competition in the future? Logically, it is when entry from new technologies is intermittent enough such that any particular one represents an important fraction of total competition going forward. Suppose, for example, a technology intensive industry in which there are “generations” of technology. When a new generation is invented by an entrant, they may seek to enter and compete against the existing firms. Yet this does not happen constantly, and the technical capabilities for Like the Internet-based entrants who sought to compete against Microsoft, the entrants may have very promising but unproven technology. These are circumstances in which a market test is highly valuable.