Barriers to exit are often not assessed in competition cases for three main reasons: 1) Merger regimes focus on the incremental impact of a merger on competition rather than existing barriers, which are taken as a given. 2) Article 101 and 102 cases compare scenarios with and without the agreement/behavior, where most barriers would be present in both. 3) Other cases usually frame barriers to exit as barriers to entry instead.

1. Barriers to exit
OECD Competition Committee
round table
4 December 2019
Matthew Johnson, Partner
© Oxera, 2019.

2. 24 December 2019
Overview
Part I: why are barriers to exit often
not assessed in competition cases?
Part II: wider economic/
competition policy perspective
Part III: final thoughts/
areas for further discussion

3. 34 December 2019
Overarching points for this presentation
• focus on barriers to exit that are not simply a type of barrier to entry; barriers to
entry are already well understood and often discussed in competition cases
• candidate definition of an anticompetitive exit barrier: something that reduces
market exit by inefficient firms
• focus on the fundamental competition policy objective of increasing efficiency through
a process of rivalry between firms
• candidate definition of exit: a firm leaving a market along with its inefficient assets
• but welfare impact may depend on whether any efficient assets remain in the market
under new ownership
• focus on the binary idea of exit, but in reality efficiency benefits can be achieved if
inefficient firms shrink or sell their assets to more efficient uses

4. Part I: why are barriers to exit
not assessed in competition
cases?
44 December 2019

5. Mergers
• standard merger control theories of harm could be affected by the presence of exit
barriers (unilateral effects, coordinated effects, vertical foreclosure, conglomerate effects)
• but many merger regimes focus on the incremental impact of a merger on competition,
compared to the counterfactual in which the merger did not occur
• rare that a merger would in itself increase or decrease barriers to exit so these barriers
are often taken as a given in both factual and counterfactual scenarios
example: Statoil Fuel and Retail / Dansk Shell EUMR (2016)
The failing firm/exiting firm defence (FFD)
• strict application could in itself be a barrier to exit if it deters inefficient firms from exiting
• but the impact is very hard to judge as it depends on a number of factors
• if the counterfactual is that the target firm …
• and its inefficient assets would exit the market…it may be better to block the merger
• and its efficient assets would exit the market…it may be better to clear the merger
• would exit but inefficient assets stay in the market…it may be safe to clear the merger
54 December 2019

6. Article 101/102 cases
64 December 2019
• framework for assessing horizontal
agreements (and horizontal effects of
vertical agreements) focuses on
competition between firms that are actual
or potential rivals
• barriers to exit are rarely considered
• often not pertinent to the assessment as
the comparison is the factual situation
with the agreement in place compared
with a counterfactual without the
agreement
• most barriers to exit would be present in
both the factual and the counterfactual
unless specific to the agreement (e.g. a
crisis cartel)
• framework that focuses on market
definition, market power, and abuse of
market power
• exclusion of rivals is the most common
concern in such cases
• in principle, the ‘as efficient competitor’
test (if used) ensures that Art. 102 does
not in itself act as a barrier to exit for
inefficient firms
• in reality, the test allows the dominant
firm’s own costs to be used, so cases
rarely need to consider the efficiency of
the actual competitors that may be
excluded from the market by the
behaviour of the dominant firm
Article 101 Article 102

7. Other types of competition cases
74 December 2019
• examples of barriers to exit concerns, but
almost always framed as barriers to entry
• UK groceries: controlled land order,
prevented land banking by large
supermarkets, essentially forcing them
to exit if they were not actively using
the asset (land)
• UK private motor insurance: sunk cost
of advertising (which would be lost on
exit) was seen as a barrier to entry for
firms considering launching new price
comparison websites
• clear risk of aid creating barriers to exit,
reflected in guidance and decisional practice
• rescue and restricting aid: ‘first time, last
time’ principle, to avoid inefficient firms
being continually bailed out
• remedies designed to ‘shrink’ aid recipients
even if not causing them to exit, e.g.
Lloyds, Royal Bank of Scotland; in line with
the principle of markets punishing
inefficient firms and rewarding efficiency
• Oxera 2017 ex post assessment for DG
Comp considered aid as a barrier to exit
• in the cases studied little or no evidence of
aid preventing exit for aided firms versus a
no-aid counterfactual, but some evidence
of other, non-aided firms exiting
Market investigations State aid

8. Part II: wider economic/
competition policy perspective
84 December 2019

9. How do barriers to exit fit into the wider competition
policy framework?
Why are exit barriers potentially bad for competition?
• competition increases efficiency as efficient/innovative firms gain market share and
inefficient firms decline; end result is that least efficient firms exit the market
• 2014 OECD Factsheet on competition policy and macro outcomes
• highlights importance of ‘external restructuring’ for driving productivity
• ‘internal restructuring’, i.e. competition disciplining firms to behave more efficiently
with their existing structures, is less important
• when exit barriers prevent these competitive mechanisms from working, limits benefits in
terms of market efficiency and productivity
Are exit barriers always bad?
• complementary products—may be efficient for firm to provide product that is not
standalone profitable if leads to increased overall profitability, e.g. ‘loss leaders’
94 December 2019

10. Part III: final thoughts/
areas for further discussion
104 December 2019

11. Final thoughts/further discussion
Insolvency/administration is a double-edged sword; ideally it needs to:
• ease the exit of firms and assets that are fundamentally inefficient
• ensure that efficient assets do not exit and are redistributed to the most efficient
user
• prevent the accidental exit of firms that are fundamentally efficient but have
suffered a temporary issue
Do any current regimes get close to this standard?
114 December 2019
Look beyond market definition boundaries: e.g. a barrier to exit for a high street
clothes shop, such as a long-term rent agreement with exit penalties, may prevent
more efficient use of that space by a restaurant
Think separately about inefficient firms and inefficient assets
• market for corporate control

12. Contact:
Matthew Johnson
matthew.johnson@oxera.com
+44 (0) 1865 253026
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