Are Judges Smarter than Economists? Sunk Costs, The Threat of Entry and The Competitive Process

Several recent antitrust cases indicate that courts believe the threat of entry can serve as an effective deterrent to an anticompetitive price increase. Yet there does not exist in the economic literature a general model that explains how entry can be such a threat, given the presence of small but positive sunk costs. This paper presents such a model, using concepts of buyer strategies and uncertainty. The applicability of such a model is then discussed using recent court decisions.