Opitmal Antitrust Enforcement: Competitor Suits, Entry, and Post-Entry Competition

We consider the effect of competitor suits in a model in which an incumbent can take an action that deters the entry of a rival. The option to sue the incumbent can provide a subsidy for entry which can maintain competition even when the incumbent takes this action. Liability for the entrant’s lost profits, however, can soften post-entry competition. If the incumbent’s action is efficient, e.g. it increases the rival’s costs (but does not reduce the incumbent’s costs), then competitor suits (even with maximal antirust liability) cannot deter the incumbent from increasing the rival’s costs by at least a small amount. Thus, the paper suggests that government suits are preferable for inefficient actions while competitor suits are preferable for efficient actions that deter efficient entry.