Politically Imposed Entry Barriers

The antitrust agencies analyze consequences of proposed mergers assuming that imports are constrained by existing quotas, a second-best approach. This policy is flawed. Quotas are endogenous. If a merger allows firms to reduce output, the quota will be increased. If an industry has sufficient political power to obtain subsidies from government then the authorities should assume that these subsidies will be reduced if market power increases. Paradoxically, for political entry barriers truly in the public interest, the antitrust authorities should take the barrier as given. We provide evidence of a large adjustment of tariffs to changes in market power.