OECD - Korean
Regional Centre for Competition
27 June to 29 June 2007
Jeju Island, Korea
Barriers to Entry
Mr Brenton Philp
Director
Mergers and Asset Sales Branch
Australian Competition & Consumer Commission
1
INTRODUCTION........................................................................................................ 3
BACKGROUND .......................................................................................................... 3
RELEVANCE OF BARRIERS TO ENTRY ............................................................ 3
ENTRY.......................................................................................................................... 5
Likely
Timely
Sufficient
5
5
6
BARRIERS ................................................................................................................... 6
Trade Practices Act 1974 (Cth)
Characterisation
6
7
ANALYTICAL APPROACHES ................................................................................ 9
Barriers and time
Risk
10
11
CONCLUSION .......................................................................................................... 12
DISCUSSION POINTS ............................................................................................. 13
EXAMPLES ............................................................................................................... 14
ACCC v Qantas Airways Limited
Britax Childcare Pty Ltd - proposed acquisition of BabyLove Products Pty Ltd
Fairfax Media Limited - proposed acquisition of Rural Press Limited
Barloworld’s proposed acquisition of Wattyl
14
18
19
20
REFERENCES ........................................................................................................... 22
CONTACTS ............................................................................................................... 22
2
Introduction
The purpose of this paper is to supplement the discussion of the analysis of barriers to
entry in the competition law1 context. In particular, this paper considers:
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the relevance of barriers to entry in competition analysis;
the concept of entry;
the identification of barriers to entry;
approaches to analyse barriers to entry; and
a number of examples where the Australian Competition and Consumer
Commission (ACCC) has considered barriers to entry within its legislative
framework.
For the most part this discussion draws its comments from the various competition
agency merger guidelines, and particularly the Merger Guidelines of the ACCC.
However, as will be discussed, this discussion should not be confined to merger
analysis.
Background
The Trade Practices Act 1974 (the Act) governs the behaviour of Australian markets,
prohibiting anti-competitive and unfair conduct and providing for consumer
protection from misleading business practices.
The competition provisions of the Act aim to encourage, support and strengthen
competition. This is because free and fair competition brings about efficient
production and the appropriate allocation of resources. That is, competition ensures
that producers make the things consumers want in the most efficient way possible and
at a competitive price, and that there is an effective and efficient allocation of
resources.
Competition law in Australia is largely based on the principle of allowing the
competitive process to continue up until such time that the conduct has the purpose or
effect of substantially lessening competition in a market. This is commonly referred to
as the ‘competition test’. Some conduct is prohibited outright under the Act as it is
deemed, by its very nature, to have a negative effect on competition. These per se
prohibitions include price fixing, boycotts, resale price maintenance and third line
forcing. To all these areas barriers to entry are a relevant consideration.
Relevance of barriers to entry
A good place to start a discussion on the relevance of barriers to entry is the Federal
Court of Australia:
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
1
Competition law is the term used to describe antitrust law in Australia, and includes the regulation of
monopolies/ market dominance, mergers, anti-competitive agreements and restrictive trade practices.
3
relevant market … To what extent is it rational or possible for new entrants to enter the
market?2 [emphasis added]
As noted by the Federal Court, one of the basic tenets of competition policy is to
prevent the illegitimate use of market power by a firm acting independently of
competition and market forces. Such exercise of market power is considered
detrimental to the competitive process and the aims it seeks to achieve – increasing
efficiency gains, price reductions, improved service, innovation and alike. This
illegitimate use of market power occurs when market power is misused3(unilateral
conduct), or market power is gained and illegitimately exercised through coordinated
(or collusive) conduct4. Whilst some areas of competition law act to penalise these
uses after the fact, others, such as merger regulation, seek to prevent its accretion in
the first place.
Central to the concept of market power are barriers to entry. Barriers to entry and
market power are mutually dependent – without high barriers market power is
unlikely to exist. This has been recognised by the High Court of Australia:
although a large market share may be evidence of market power, it is only when it is not
rational or possible for new entrants to participate in the market that the market share can
translate into substantial market power.5
If there are low barriers to entry, any attempt by the entity to exercise market power is
likely to encourage the entry of new firms. By providing an alternative to the entities
customers, the entry of new firms will render the exercise of market power
unsustainable. Conversely, where barriers to entry are high and new entry is not
rational or possible there may be little to constrain the exercise of market power.
Potential entry and expansion can also be considered in similar terms. Where barriers
to entry are low, the credible threat of new entry may temper the illegitimate use of
market power by incumbent firms. Likewise, where barriers to expansion are low
smaller firms within the market may constrain the actions of incumbent firms through
their expansion or threat of expansion. Where barriers are high, the threat posed by
potential new entry or expansion is much less on the incumbent firm. The following
discussion applies equally to potential entry and expansion.
An analysis and understanding of barriers to entry is, then, crucial to an understanding
of the exercise of market power – either through the effects of proposed mergers,
unilateral exercise or coordinated exercise of market power.
2
Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 at 63 per Lockhart and
Gummow JJ.
3
Referred to as abuse of dominance in other jurisdictions.
4
For a discussion of entry barriers and collusion see: Ivaldi, Jullien, Rey, Seabright and Tirole, The
Economics of Tacit Collusion; final report for DG Competition, European Commission, IDEI,
Toulouse, March 2003 from 16.
5
Boral Besser Masonry Limited (now Boral Limited) v Australian Competition and Consumer
Commission [2003] HCA 5 at 303 per McHugh J, referring to the comments of Mason CJ and Wilson J
in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 189190.
4
Entry
Before considering what may or may not constitute a barrier to entry, it is worth
considering what entry is for the purposes of competition analysis. In considering the
Universal Music matter, Hill J noted that:
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 6. [emphasis added]
As noted by Hill J, for entry to be effective in ameliorating the market power concerns
arising in the market it must be sufficiently likely, timely and sufficient in scale to
constrain the incumbents.
Likely
As a general concept, entry will be more likely where some reasonable return on
investment is available to attract entry into the market. Whilst this is an important
consideration for the firm considering entry to the market, for the competition
analysis it is relevant in understanding the likelihood of successful entry and the
constraint that entry is likely to impose on the incumbent firms.
The question asked by the United States Department of Justice and Federal Trade
Commission, in the context of mergers, is whether:
the proposed merger would be likely to induce firms to [enter] in a timely fashion and in a
sufficient magnitude to deter or counteract the merger’s anticompetitive effects. 7
This likelihood is considered distinct to the ability of firms to enter the market. That
is, whether firms would enter the market as opposed to could enter the market in
response to an increase in price. It considers whether there is an adequate profit
margin, at pre-merger prices, to provide an incentive for entry. Consideration is
necessarily required of sunk costs, which are discussed below, and possible returns to
the new entrant.
Timely
Competition agencies generally accept that entry will be considered timely if it can be
successfully achieved within two years from initial planning to significant market
impact. This will include establishing the reputation of the brand, achievement of
regulatory approvals and the development of specialised inputs to production.
6
Australian Competition & Consumer Commission v Universal Music Australia Pty Limited [2001]
FCA 1800 at 391 per Hill J.
7
United States Department of Justice, Federal Trade Commission, Commentary on the Horizontal
Merger Guidelines, March 2006 at 38. A similar approach is expressed by the European Commission
in their Guidelines on the assessment of horizontal mergers under the Council Regulation on the
control of concentrations between undertakings (2004/C 31/03) at 69 and the UK Office of Fair
Trading, Mergers: procedural guidance, 2002 at 4.18; UK Office of Fair Trading, Mergers:
substantive assessment guidance, 2002 at 4.17.
5
Whilst entry outside this time may be possible in some circumstances, serious
consideration should be paid to its ability to undo possible competitive harm. Would
the incumbents be able to exercise market power during the course of the new entry
set-up such that the new entry will not ameliorate the harm to competition? Will the
exercise of that power affect the ability of the new entrant to compete in the medium
term? Or, is there a substantial lessening of competition, and resulting harm, due to
the delay in entry even though competition may be reintroduced after fully effective
entry? These questions need to be answered for the consideration of longer term entry.
Sufficient
Sufficiency of entry asks the question of whether the entry will be sufficient to
counteract those effects on competition which are of concern. In the merger context
this may be to push prices down to pre-merger levels. The entry must be of such a
magnitude and character that it would deter or counteract the competitive effect of
concern8. For example, whilst fringe entry might be likely and able to be achieved in
a timely way, if it confines itself to niche areas within the market and does not pose a
competitive constraint on the actions of the incumbent firms in any meaningful way it
is unlikely to be sufficient to redress the competition concern in the market. Thus, in
a merger context, the incumbent firms may be able to continue to enjoy monopoly
profits with no incentive to push prices back to pre-merger levels. In the non-merger
context incumbents may be unconstrained from engaging in anti-competitive acts
such as anti-competitive bundling or service erosion.
Barriers
Whilst it is established that entry, or indeed potential entry, is an effective way of
controlling the exercise of market power, the barriers that prevent or hinder that entry
need to be considered in analysing the ultimate effect that entry or potential entry may
have on the competitive actions of incumbent firms.
Trade Practices Act 1974 (Cth)
In Australia, section 50 of the Trade Practices Act 1974 (Cth) (the Act) is the only
provision of the Act that makes distinct reference to barriers to entry:
Prohibition of acquisitions that would result in a substantial lessening of competition
(1) A corporation must not directly or indirectly:
(a) acquire shares in the capital of a body corporate; or
(b) acquire any assets of a person;
if the acquisition would have the effect, or be likely to have the effect, of substantially
lessening competition in a market.
…..
8
Ibid at 46.
6
(3) Without limiting the matters that may be taken into account for the purposes of
subsections (1) and (2) in determining whether the acquisition would have the effect, or be
likely to have the effect, of substantially lessening competition in a market, the following
matters must be taken into account:
…..
(b) the height of barriers to entry to the market;
…..
Thus the ACCC and the courts are required to consider the barriers to entry in
conducting merger analysis. However, that is not to say that a consideration of
barriers to entry is confined to merger analysis.
Section 45 of the Act requires consideration of whether a contract, arrangement or
understanding does, or is likely to, result in a substantial lessening of competition.
Integral to this the ACCC and the courts will consider the ability of new firms to enter
the market, as well as the ability of existing firms to expand, to counter the effect on
competition before it becomes substantial. For example, an increase in bargaining
position may result from a coordinated arrangement, however if this change to
bargaining position may be tempered by potential or actual new entry, the effect on
the competitive environment may well be negligible.
The ACCC will also consider barriers to entry in investigations of per se prohibitions,
such as cartel conduct. Markets which exhibit high barriers to entry are less likely to
be constrained by potential new entry and therefore a cartel in that market is more
likely to be stable and able to be policed by its members. This will have a direct
relevance to the penalty that may be imposed, following successful prosecution, and
also influences areas that the ACCC may target for cartel awareness raising,
monitoring and investigation.
Characterisation
Some characteristics of the market or the industry, such as regulations, economies of
scale and brand loyalty, can create barriers to entry. The key issue is whether or not
there are impediments such that new entrants are unable to exploit otherwise
profitable circumstances and enter the relevant market in a timely way following the
exercise of market power. This will necessarily depend on the exact situation under
analysis, and thus it is not possible to list such market characteristics in any
determinative way.
Similarly, certain characteristics, while not an entry barrier in their own right, might
act to reinforce other characteristics that are entry barriers, leading to higher entry
barriers and stronger impediments to entry. For example, the presence of fixed-term
customer contracts may represent a barrier to entry. If this characteristic is
accompanied by a technology that involves significant economies of scale, then the
size of the barrier to entry can be considerably increased. In the absence of significant
economies of scale a new entrant may be able to effectively enter by signing up
customers over time as they come off contract. This can take a considerable period of
time. If, in addition, there are significant economies of scale in production, a delay in
building up scale can be extremely costly. This may make entry less likely or even
7
unviable, and thus reduce the constraint that new entry or potential new entry may
place on incumbent firms.
The current ACCC Merger Guidelines (Merger Guidelines)9 discuss the ACCC
approach to barriers to entry in a merger context, describing barriers to entry as any
feature of a market that places an efficient prospective new entrant at a significant
disadvantage compared with incumbent firms. Whilst non-exhaustive lists of
categories of possible barriers may be created10, as stated earlier entry barriers are
dependent on market and industry circumstances and no simple exhaustive list can be
created. So as to not focus solely on those matters contained within a list it may be
appropriate to consider entry barriers under three broad categories. Some industry or
market characteristics that are frequently relevant to conducting such analysis include:
Legal or regulatory barriers: These include but are not limited to 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.
Structural or technological barriers: These include but are not limited to factors
such as 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).
Strategic barriers: These include but are not limited to 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.
As noted above, in identifying and analysing the effectiveness of entry, consideration
is commonly given to whether entry is likely to have a market impact within a two
year period. This may be demonstrated by either deterring or defeating the attempted
exercise of significant market power by the relevant firm. In some markets the threat
of entry is sufficient to constrain a firm from engaging in anti-competitive conduct. In
others, actual entry will be required. The latter would require entry on a sufficient
scale and which offered a product sufficiently attractive to consumers to be effective.
Once the market conditions conducive to impede entry are identified, the next step is
to analyse the effect they may have on new entry, the threat of potential entry, or
expansion in the market.
9
ACCC, Merger Guidelines, June 1999 at 5.115. Copies are available at www.accc.gov.au.
At time of writing the ACCC was considering redrafting the Merger Guidelines.
10
For example see: Ibid at 49.
8
Analytical approaches
In analysing the height or extent of barriers to entry different approaches can be
adopted. The following discussion is predominantly based on the Australian
experience.
In Australia the ‘height’ of barriers to entry indicates the extent to which incumbents
can raise the market price above its competitive level without attracting entry. It is
not necessary for a merger or arrangement to increase barriers to entry for it to be
anti-competitive; only that significant barriers exist, providing incumbents with
discretion in pricing and other conduct. If the merger or arrangement also increases
barriers to entry, the anti-competitive effects are likely to be more severe11.
Dr Maureen Brunt, in her oft quoted passage, has provided the following test of what
constitutes a significant barrier to entry for trade practices purposes12:
The essential test for whether or not there is a significant barrier to entry can be expressed
simply enough: it is whether the threat of entry of whatever kind will constrain incumbents to
behave competitively. It follows that neither initial entry nor eventual established supply
must necessarily be of the full-line variety. Leading firms can be constrained by a collection
of more specialised rivals. Firms may enter at one scale or one product-range and grow to
another. However we cannot speak of easy entry if the only viable entry is that which occurs
at the fringe of the market in competition with that fraction of the incumbents’ business that
has high marginal costs; or if the only viable entry is of the fringe products that fail to attack
the incumbents’ core business. There must be, in Richard Schmalensee’s phrase, ‘real
pressure on established firms’ profits’.
In assessing the height of barriers to entry, the ACCC has stated that it will have
regard to the following13:
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sunk costs in both production capacity, accessing shelf space, advertising and
promotion;
any regulatory restrictions on entry, such as licensing requirements and
industry standards;
any requirements for scarce inputs;
the extent of brand loyalty enjoyed by incumbents;
minimum efficient scale of operation;
cost penalties for operating at sub-optimal capacity;
price elasticity of demand;
market growth or decline; and
potential response of incumbents to new entry.
The market impact of actual or potential entry on the firm’s conduct can vary in time
and is likely to vary with the nature of the goods or services supplied. For example,
where purchases are one-off, such as building services, actual entry may be required
before there is any impact on current conduct, since high prices today are unlikely to
11
Merger Guidelines at 5.123.
Brunt, M, ‘Australia and New Zealand Competition Law and Policy’, 19th Fordham Conference on
International Antitrust Law and Policy’, 1992; as quoted in the Merger Guidelines at 5.125.
13
Ibid at 5.124.
12
9
deter tomorrow’s customers. However, for goods which are subject to repeat
purchases and significant consumer loyalty, potential entry is more likely to have an
impact on current conduct, which has the potential to lose customers in the future.
Product life can also be important. Consumers may choose to extend the life of their
existing durable goods rather than buy new ones if the price is too high. In such
markets, entry need not occur as swiftly to be effective. In markets characterised by
bidding for large scale contracts, a potential entrant may be able to exert pressure on
incumbent firms’ conduct by submitting bids in advance of physical entry. If
successful, those contracts could then provide the springboard for entry, e.g. an
international firm considering entry into the national market. Therefore, in
considering barriers, the ability to achieve competitive impact needs be considered.
Evidence of the past success or failure of new entrants to establish themselves as
mainstream competitors in the relevant market can also be useful in determining the
height of barriers to entry. Historic evidence of high prices and profits being
maintained for long periods without encouraging new firms to enter the market, or
historic evidence of firms entering, failing and leaving the market, will suggest there
are high barriers to successful effective entry into the relevant market. Also relevant
will be evidence of concrete plans of firms, either domestic or overseas, to launch a
major entry into the market. However, if the historical record is one of failed entry,
there needs to be some convincing that the plans of the new entrant are likely to meet
with more success than those of past entrants.
Barriers and time
When considering the height of barriers to entry in markets, it is necessary to focus on
both the absolute size of any barriers that face new entrants and the length of time that
such barriers will delay or impede effective competitive entry. In a trivial sense,
barriers to entry always exist in that it takes at least some time for a new firm to enter
a relevant market and attract customers. However, the consideration is whether or not
an acquisition or arrangement will result, or has resulted, in a substantial lessening of
competition. When considering barriers to entry it is necessary to determine whether
or not the barriers to entry for a relevant market are of such height and duration that
the merged entity or incumbent will be, or has been, sufficiently unconstrained that
the merger will result in a substantial lessening of competition or the incumbent has
been able to act without constraint in an anti-competitive way.
A crude rule of thumb, in a mergers context, is, if following a price rise or other
exercise of market power by the merged entity, effective entry within two years is
able to ‘duplicate’, the pre-merger productive activities in the relevant markets of at
least one of the two merging firms. This suggests that the potential for entry will
prevent the merger leading to a substantial lessening of competition. That is, if new
entry within the two year period can be established and effectively replace the
productive capacity of one of the merger firms, the competition concerns are unlikely
to arise. This, then, requires a consideration of the temporal element of barriers.
Another temporal aspect to entry barriers is, when analysing the competitive effects of
a merger or arrangement, the height of barriers to entry in a market may be measured
by considering the extent to which the incumbents in the market, if they acted in
unison, could maintain a significant and sustained reduction in competition without
10
attracting entry in a sufficiently short period of time. For example, if incumbents in
the relevant market acting in unison were able to profitably maintain an on-going
price rise of, say, five percent without attracting significant entry in a sufficiently
short time period, then this would be strong evidence that there are significant barriers
to entry in the relevant market.
In a merger context, a merger may substantially lessen competition if there are entry
barriers in a relevant market that, while not acting as an absolute prevention on entry,
act to delay and impede entry to such a degree that the merged entity faces a reduced
competitive constraint over a significant period of time. The fact that entry may
eventually occur in a market does not mean that there is no substantial lessening of
competition. Rather the critical issue is the likely time, degree and competitive vigour
of any new entry. As Carlton notes:
“[a]s a practical matter, the long run may be of no interest whatsoever. It may take so long to
get there that the persistence of supracompetitive profits until then turns out to be the fact of
practical importance, not that these excess profits are eliminated in some far-off future
year”.14
There is no unique combination of height of entry barrier and time frame that can be
used to distinguish between effective and ineffective entry in merger analysis. Rather,
the key issue is whether new entry is sufficiently likely and timely to prevent a
substantial lessening of competition and this evaluation will vary with each matter.
For example, again in a merger context, if, in response to an on-going price rise of
five percent, entry by one or more firms would be able to effectively and
economically replace all the production of the smallest of the merging parties within
two years, then this suggests that entry will provide an effective competitive
constraint post-acquisition.
As we have already noted, entry need not occur to constrain the merged firms. In
most cases, all that is required is that there be the potential for timely entry to pose a
competitive constraint on incumbents.
Risk
The UK Competition Commission (UKCC) offers a slightly different approach to
considering the potential for entry or expansion: risk15. Simply put, 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. This
concept of risk attaches not only to the probability of entry, but also to those factors
that influence that risk decision. These factors include the existence of high start up
costs that are likely to be forgone on exit (sunk costs). The higher the value of such
sunk costs, the greater the risk and accordingly the potential for entry to be deterred.
In a similar way, what may otherwise be called strategic barriers to entry (discussed
above) are an important consideration in assessing the risk profile of entry and
therefore dynamic market conditions are also considered.
D. Carlton, “Why barriers to entry are barriers to understanding”, American Economic Review,
(2004) 94, 466-470 at 468.
15
UK Competition Commission, Merger References: Competition Commission Guidelines, June 2003
at 3.47.
14
11
Conclusion
Barriers to entry are highly relevant to consideration of unilateral effects and
coordinated effects analysis. Whilst the overriding question remains as to the ability
of the incumbent firms to exercise market power (and the resultant effects when they
do so), the question of entry barriers goes toward the ability of new entrants, potential
entrants or existing market members seeking to expand, to constrain the exercise of
market power through their threat of entry. If the barriers which inhibit this entry are
high, the constraint posed by these firms on the actions of incumbents is likely to be
low and thus market power may be exercised more easily.
This is to say, to what extent is it rationale or possible for new entrants to enter the
market and constrain the exercise of market power by incumbent firms?
12
Discussion points
Through the course of Australian judicial consideration, a number of questions have
arisen, either through submission or questioning, regarding barriers to entry. Whilst
no determinative view has been achieved of these questions, they are listed below for
consideration and discussion.
1.
Should barriers to entry for competition consideration include those barriers that
the incumbent also had to deal with?
The argument here is that if the incumbent also had to overcome those barriers
on entering or establishing the market – sunk costs, compliance with regulatory
standards, etc, then should they be truly considered barriers to entry, or
advantages of incumbency? Or rather, are they just part of entry to the market
that all participants have to overcome?
2.
Is a lack of access to financial capital a barrier to entry?
Should deep pockets, or lack thereof, of the new entrants be considered as part
of an analysis of barriers to entry? If financial resources are considered, should
entry barriers be considered differently between potential entrants depending on
their financial position (particularly with regard sunk costs)?
3.
Can you disregard uncommitted entry in the competition analysis?
Does uncommitted entry exclude the potential pro-competitive effects of hit and
run entry? How does hit and run entry consider in an analysis of entry barriers?
4.
Low prices as a barrier to entry? What of reputation for predatory conduct?
If low prices indicate that no advantage of market power is being taken, then do
they factor in an entry barrier analysis? Are low prices indicative of
pro-competitive pricing, or evidence of a reputational strategic barrier?
13
Examples
ACCC v Qantas Airways Limited16
By way of background, Qantas Airways Limited (Qantas) is the national full service
domestic and international air carrier of Australia. In 2002 the ACCC commenced
proceedings against Qantas alleging predatory conduct (misuse of market power)
engaged in by Qantas in response to entry of Virgin Blue into the Australian domestic
Adelaide – Brisbane route. Whilst the matter was settled on a no admission basis, the
pleading of barriers to entry is illustrative of one approach, and particularly alleging
strategic barriers to entry.
The ACCC pleaded that:
16. At all material times Australia, as a sovereign state, has had the right to
exclude the airlines of other countries from using Australian airspace and
thereby regulate the extent to which foreign airlines may operate in Australia.
Australia has, and had at all material times, only given the right to carry
domestic passengers and freight in Australia (“cabotage”) on an ongoing
scheduled basis to airlines of New Zealand and India. Australian government
policy at all material times was not to enter into air services arrangements
giving cabotage with other countries unless there was a benefit to Australia…
Particulars
a. The principle of complete and exclusive sovereignty over a country’s
own airspace was established by the first multilateral legal convention
on international civil aviation rights, signed in Paris in 1919;
b. The Chicago Convention in 1944 established the foundation for a
bilateral system of air services arrangements between countries under
which certain freedoms to use the airspace of another country may be
granted. The highest level of such freedoms is cabotage;
c. The Air Navigation Act 1920 (Cth) gives effect to the Chicago
convention in Australia.
17. At all material times, in order to commence offering scheduled air transport
services in Australia between specific destinations, a new entrant require inter
alia:
a. an air operating certificate to operate such a service which was granted
only on condition that, inter alia:
i. all relevant aircraft and facilities proposed to be used are
inspected and approved;
16
Australian Competition and Consumer Commission v Qantas Airways Limited, No N408 of 2002,
Federal Court of Australia, New South Wales District Registry.
14
ii. a compliance statement is prepared and approved;
iii. the person’s identity, financial position and corporate
management is established and approved;
iv. flight manuals for each type of aircraft proposed to be used are
prepared and approved;
v. flight attendants operations manuals are prepared and
approved;
vi. training and checking manuals are prepared and approved;
b. approval of the Foreign Investment Review Board, if the carrier has
substantial foreign investment;
c. sufficient aircraft and appropriately trained staff to provide the service;
d. access to sufficient capital to enable the person to carry on business
until it becomes established;
e. the ability to incur substantial sunk costs, including advertising and
promotional fares, to develop customer awareness of the service;
f. access to airport terminals, hangars, baggage handlers, ticket counters
and associated operating and maintenance facilities within Australia at
all those cities to and from which the new entrant proposes to operate;
and
g. landing rights (“slots”) at airports to and from which the entrant
proposes to operate at times that are attractive to customers. If services
to or from Sydney are to be offered, there are only a limited number of
slots available at Sydney airport which are offered by way of a ‘bid’
system.
18. At all material times, in order to commence offering scheduled passenger air
transport services between Adelaide and Brisbane, a new entrant required
inter alia:
a. the matters referred to in paragraph 17(a) – (e);
b. access to airport terminals, hangers, baggage handlers, ticket counters
and associated operating and maintenance facilities in Adelaide and
Brisbane; and
c. information and computer systems necessary to support an airline
operating between Adelaide and Brisbane; and
15
d. slots at Adelaide airport and Brisbane airport at times that are attractive
to customers.
19. At all material times, an airline that had entered the Australian airline market
and wished to expand its operations or network by competing on a new route,
including between, in each direction, Adelaide and Brisbane, or wished to
enter the Adelaide-Brisbane market, incurs higher costs relative to those of an
incumbent, of switching to use its aircraft between the various routes on
which it could seek to operate including:
a. sunk costs of obtaining an air operating certificate and approvals that
authorise it to operate on the new route;
b. costs of acquiring sufficient additional aircraft and appropriately
trained staff to provide the service or, if aircraft taken from an existing
route and not replaced, losing its investment on that existing route;
c. sunk costs of acquiring and maintaining terminal and other operating
facilities in the airports it proposes to operate to and from; and
d. sunk costs of advertising and promotional fares to establish awareness
of operations on the new route.
20. At all material times a barrier to entry into the Australian airline market or the
Adelaide –Brisbane market, and, or alternatively, to expansion within the
Australian airline market, was the presence in the market of Qantas, which
had and has the competitive strengths and advantages pleaded in paragraph
25.
21. At all material times a barrier to entry into the Australian airline market or the
Adelaide –Brisbane market, and, or alternatively, to expansion within the
Australian airline market, was the known risk of Qantas increasing the
capacity it offered on such routes that a new entrant may seek to operate on
and, or alternatively, reducing its fares on those routes (including by matching
or undercutting those of a new entrant), even if the new entrant had
substantially lower operating costs than Qantas and even if Qantas sustained
substantial losses on such route in so doing, thereby making it unprofitable for
the new entrant to operate on that route.
Particulars
The matters by reason of which persons considering entry into the Australian
airline market or the Adelaide – Brisbane market, or expansion within the
Australian airline market, would know of the risk of Qantas engaging in the
conduct referred to include:
a. the knowledge within the airline industry of the competitive strengths
and advantages of Qantas pleaded at paragraph 25;
16
b. the knowledge within the airline industry that at all material times the
conduct referred to was conduct that an airline in the position of
Qantas had the capacity to engage in, if it chose to do so, to advance its
commercial interests;
c. the knowledge within the airline industry that at all material times it
was likely to be in the commercial interests of Qantas to engage in
such conduct;
d. the knowledge within the airline industry that Qantas had responded to
the entry of Compass I and Compass II into the Australian airline
market by reducing its fares to match those of new entrants;
e. the knowledge within the airline industry of the entry of low cost
carriers (as defined…) into the North American and European markets
in competition with incumbent full service airlines (as defined…) in
those markets, where the incumbent full service airlines responded to
the entry by increasing capacity and reducing fares.
22. At all material times, a barrier to entry into the Australian airline market or
the Adelaide – Brisbane market, and, or alternatively, to expansion within the
Australian airline market, was the known risk of entering a market with a
history of repeated new entry by new competitors.
23. By reason of the matters pleaded in paragraphs 16 – 17 and 19 – 22, at all
material times, including in the period …., there were substantial barriers to
entry into and, or alternatively, expansion into the Australian airline market.
24. By reason of the matters pleaded in paragraphs 16 and 18 – 22, at all material
times, including in the period …., there were substantial barriers to entry into
and, or alternatively, expansion into the Adelaide – Brisbane market.
17
Britax Childcare Pty Ltd - proposed acquisition of BabyLove Products Pty
Ltd17
On 20 September 2006, the ACCC announced its decision to not oppose the proposed
acquisition of BabyLove Products Pty Ltd by Britax Childcare Pty Ltd (Proposed
Acquisition). The ACCC decided that the Proposed Acquisition would not have the
effect, or be likely to have the effect, of substantially lessening competition in
contravention of section 50 of the Trade Practices Act 1974 (the Act) in the markets
for the manufacture and supply of child car restraints and booster seats in Australia, or
the market for the supply of infant wheeled goods (strollers and prams) in Australia.
During discussion of the acquisitions in its Public Competition Assessment, the
ACCC found the following:
Barriers to entry and expansion
30. The ACCC considered that the threat of potential new entry would only be
likely to provide a limited competitive constraint on the merged firm within
the foreseeable future.
31. Information before the ACCC indicated that the combination of substantial
sunk costs, the small size of both child car restraint markets, limited capacity
for growth and the unique Australian Standards all act as disincentives for
entry in the national market for child car restraints for ages up to 3 to 4 years
old (type A, type B and type AB restraints). Further, the minimum efficient
scale is relatively high. A new entrant would need significant financial
backing, given the likelihood of taking 4-5 years to reach the minimum
efficient scale.
32. New entrants face greater barriers at the mid and high-end of this market. The
ACCC’s inquiries indicated that because child car restraints are a safety
product, brand is significant. The ACCC focussed closely on this issue during
its investigation. Britax’s Safe n Sound brand has a high degree of brand
loyalty which has been established over a long period of time. The ACCC
considers that brand loyalty would make it difficult to capture market share
from Britax and may deter entry.
33. Barriers to entry and expansion are not as significant in the national market for
child booster seats for ages 3 to 7 years old (type BE and type E restraints).
There is less brand loyalty as the product sold is less complex and expensive.
There is also greater potential for import competition in this market.
17
Australian Competition and Consumer Commission, Public Competition Assessment: Britax
Childcare Pty Ltd - proposed acquisition of BabyLove Products Pty Ltd, (17 October 2006) – available
at www.accc.gov.au/mergers.
18
Fairfax Media Limited - proposed acquisition of Rural Press Limited18
On 18 April 2007, the ACCC announced its decision not to oppose the proposed
acquisition of Rural Press Limited by Fairfax Media Limited (proposed acquisition),
subject to section 87B undertakings accepted by the ACCC. The ACCC was of the
view that the proposed acquisition, in conjunction with the undertakings, would be
unlikely to have the effect of substantially lessening competition in the market for the
supply of general display advertising space in community newspapers in Newcastle,
Maitland and the lower Hunter Valley in contravention of section 50 of the Trade
Practices Act 1974 (the Act). The ACCC also concluded that the proposed acquisition
was unlikely to have the effect of substantially lessening competition in any other
areas where the circulation of Fairfax and Rural Press newspapers significantly
overlaps (for example, Canberra).
During discussion of the acquisitions in its Public Competition Assessment, the
ACCC found the following:
Barriers to entry
45. There do not appear to be significant regulatory or legal barriers to
establishing a free weekly community newspaper paper in the region. Further
establishment costs (e.g. content, printing and distribution) appear to be low,
and printing and publishing capabilities are readily accessible.
46. However, market inquiries suggested that most businesses would advertise in
a new community paper only if it had a comparable circulation to the Post or
the Star and was able to attract a significant number of readers. This would
require a new entrant to launch its paper on a comparable scale to the Post and
Star to attract advertisers.
47. While entry on a smaller scale may be possible, any such papers would be
likely to have limited attraction for many advertisers.
48. Market inquiries also suggested that a significant new free weekly newspaper
may be deterred from entering the Newcastle market by concerns about
Fairfax’s anticipated response, combined with perceptions about advertisers’
loyalty to existing papers. The ACCC is aware of an aggressive response,
including by discounting advertising rates, to attempted entry into another
regional market and is concerned that the perception of a similar response in
the Newcastle/Hunter Valley region may deter entry. There also appear to be
no significant examples of recent new entry in the area that could help
substantiate an argument that barriers to entry are low.
18
Australian Competition and Consumer Commission, Public Competition Assessment: Fairfax Media
Limited - proposed acquisition of Rural Press Limited, (27 April 2007) – available at
www.accc.gov.au/mergers.
19
Barloworld’s proposed acquisition of Wattyl19
On 6 July 2006, the ACCC announced that it had formed the view that the proposed
acquisition of Wattyl Limited (Wattyl) by Barloworld Limited would have the effect,
or be likely to have the effect, of substantially lessening competition in a market in
contravention of section 50 of the Trade Practices Act 1974 (the Act). The
Barloworld Limited offer was made through its wholly owned subsidiary Barloworld
International S.L.U acting in its capacity as general partner of Barloworld Coatings
LP, a limited partnership.
In its consideration of the proposed acquisition the ACCC found the following:
Actual and potential competition from industrial and heavy duty coatings
manufacturers
26. The ACCC considered that the potential for supply of A&D paints by
manufacturers of industrial and heavy duty coatings (IC manufacturers) would
be unlikely to constrain the merged firm from increasing A&D paint prices
above competitive levels.
27. Although some IC manufacturers may have the necessary production
equipment and expertise to manufacture A&D paint, an IC manufacturer
would likely face substantial barriers to entry and expansion in terms of
requiring sufficient brand strength and access to distribution to be considered a
viable alternative to the leading national brands in the A&D Paint Market. The
requirement for well recognised brands in A&D paint is discussed below at
paragraph 34. The ACCC noted that an IC manufacturer would have limited
ability to leverage any existing brand loyalty and distribution capabilities in its
IC operations into A&D supply as:
a. A&D customers are unfamiliar with IC brands;
b. A&D customers are unfamiliar with foreign A&D brands owned by
companies that manufacture IC products in Australia; and
c. IC products are generally distributed directly to the end-user rather
than through the retail or trade outlets utilised by A&D paint
manufacturers.
28. The information before the ACCC suggested that a small but significant nontransitory increase in price (SSNIP) by the merged firm would have been
unlikely to attract entry into the A&D paints market by IC manufacturers on a
scale necessary to constrain the merged firm due to the substantial levels of
investment likely to be required in developing brand awareness and
distribution.
19
Australian Competition and Consumer Commission, Public Competition Assessment: Fairfax
Barloworld’s proposed acquisition of Wattyl, (11 August 2006) – available at
www.accc.gov.au/mergers.
20
29. The ACCC notes that PPG’s very limited market share achieved since its entry
into A&D paint supply market in 2003 demonstrates the substantial barriers to
entry and expansion facing IC manufacturers. In addition, Wagon Paints is an
example of an IC manufacturer that entered but then exited the A&D paints
market because of these barriers.
21
References
Australian Competition and Consumer Commission, Merger Guidelines, 1999.
Carlton, DW, “Barriers to Entry”, NBER Working Paper Series , National Bureau of
Economic Research, working paper 11645, Cambridge, MA, September 2005.
Available at http://www.nber.org/papers/w11645.
Carlton, DW, “Why Barriers to Entry Are Barriers to Understanding”, AEA Papers
and Proceedings, 94, 2, May 2004, 466 to 470.
European Commission, Horizontal Merger Guidelines, 2004.
Ivaldi, Jullien, Rey, Seabright and Tirole, The Economics of Tacit Collusion; final
report for DG Competition, European Commission, IDEI, Toulouse, March 2003.
Schmalensee, R, “Sunk Costs and Antitrust Barriers to Entry”, AEA Papers and
Proceedings, 94, 2, May 2004, 471 to 475.
United Kingdom Competition Commission, Guidelines on merger references, 2004.
United Kingdom Office of Fair Trading, Mergers: procedural guidance, 2002.
United Kingdom Office of Fair Trading, Mergers: substantive assessment guidance,
2002.
United States Department of Justice, Federal Trade Commission, Commentary on
Horizontal Merger Guidelines, 2006.
United States Department of Justice, Federal Trade Commission, Horizontal Merger
Guidelines, 1997.
Contacts
Brenton Philp
Director
Mergers and Asset Sales Branch
Australian Competition and Consumer Commission
[email protected]
tel: +61 2 6243 1220
fax: +61 2 6243 1212
www.accc.gov.au
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Relevance of barriers to entry