Entry Deterrence
Entry deterrence is one of the most extreme forms of competition that involves preventing a competitor from entering the market. This result can be achieved with the help of pricing: for example, the existing companies (incumbents) can set the price that may affect the demand curve rendering the entry unprofitable (Viscusi, Harrington, and Vernon 182-198). It should be pointed out that incumbent firms may accommodate a number of competitors, but in case they expect the competition to reduce their profit, they may choose to deter the entry into the market (Calzada and Valletti 1243).
Since it is usually easier for a market leader to find ways of lowering costs and prices (the experience, as well as the reputation in the market, is a valuable asset), the entrant may reconsider the decision of participating (Viscusi, Harrington, and Vernon 183-198). The threats of entry deterrence include the reduced competition and customers’ well-being which is why this phenomenon is mostly regarded as a negative one (Calzada and Valletti 1243). Antitrust laws can be used to stimulate the competition and prevent entry deterrence cases (Mankiw 354-356).
Lin describes “the entry and alliance game” through the analysis of a number of airline cases (638). The existing carriers of these cases are monopolists in their domestic markets; at the same time, they compete internationally. Before the entrance of a new competitor to their markets (in the cases those were domestic spoke markets), the two airlines companies would compete. However, once a new competitor attempted to enter, they would form alliances and set prices according to their agreements. Such an alliance, according to Lin, is a “credible threat” that is capable of keeping entrants away from the market (648). As it is apparent from the example, entry deterrence can be related to collusion.
Collusion
A collusion is a form of coordination between firms. In the case of collusion, “firms are able to coordinate in jointly raising price which serves to deliver higher profit” (Viscusi, Harrington, and Vernon 66). Collusions can be both explicit and tacit; in the former case, the agreement is achieved through meetings while the latter form is done without actual communication between the parties. In the latter case firms react to each other’s actions. The threats of collusion are similar to those of entry deterrence; in fact, the restriction of entry can become a consequence of collusion (Barbot 3; Viscusi, Harrington, and Vernon 66). That is why in certain cases the government attempts to intervene through antitrust regulations, although this intervention varies from country to country. For example, the existence of OPEC cartel is not threatened by the antitrust laws even though it has a significant influence on oil prices to the point of controlling them (Viscusi, Harrington, and Vernon 68; Mankiw 356).
Apart from that, the actions of the government can be ineffective as they give rise to tacit collusions. For example, in 1992 a suit was filed against US airlines by the Department of Justice with the aim of reducing the possibilities for collusion (Miller 569). The resulting decrees limited the possibility of communication for the airlines. Some effect was initially achieved, and the prices were reduced; however, as the current situation shows, this outcome was short-lived. According to Miller, the changes “produced no detectable lasting benefit to consumers”, and the author concludes that the actions of the Department were not effective enough (583). The bodies of governmental control, therefore, should take into account the possibility of tacit collusion.
Works Cited
Barbot, Cristina et al. ‘Vertical Collusion Between Airports And Airlines: An Empirical Test For The European Case’. Transportation Research Part E: Logistics and Transportation Review 57 (2013): 3-15. ScienceDirect. Web.
Calzada, Joan, and Tommaso M. Valletti. ‘Network Competition And Entry Deterrence’. The Economic Journal 118.531 (2008): 1223-1244. Journal Storage. Web.
Lin, Ming Hsin. ‘Airline Alliances And Entry Deterrence’. Transportation Research Part E: Logistics and Transportation Review 44.4 (2008): 637-652. ScienceDirect. Web.
Mankiw, N. Gregory. Principles of Microeconomics. 7th ed. Mason, Ohio: Thomson/South-Western, 2014. Print.
Miller, Amalia R. ‘Did The Airline Tariff Publishing Case Reduce Collusion?’ Journal of Law and Economics 53.3 (2010): 569-586. Journal Storage. Web.
Viscusi, W. Kip, Joseph Emmett Harrington, and John M Vernon. Economics Of Regulation And Antitrust. Cambridge, Massachusetts: MIT Press, 2005. Print.