When Does New Entry Deter Collusion?

John Simpson
Working Paper:

The U.S. Department of Justice and Federal Trade Commission Merger Guidelines assume that entry that is likely and sufficient will ultimately correct any anticompetitive harm resulting from a merger. If this anticompetitive harm takes the form of collusion, then such entry will ultimately end the collusive agreement. If there are few opportunities to observe and to punish defection from the collusive agreement before this entry is expected to occur, then the prospect of this entry may deter collusion completely. Thus, entry that takes more than two years, if it is both likely and sufficient, may deter collusion in markets where the time required to observe and to punish cheating is lengthy. On the other hand, entry that takes less than two years may not deter collusion in industries where cheating can be quickly detected.