these sideline or fringe firms. The entrants will seize the profit opportunity, take up the slack, and beat back the price increase.
The concept of potential competition and barriers currently has particular significance in cases in which foreign competition may play an important role in checking or undermining the market power of U.S. firms. At least until the end of the 1970s, the role of foreign competition was normally assessed in accordance with the quantity of imports presently flowing into the United States. In an article in the Harvard Law Review in 1981, 4 Professors Landes and Posner challenged this traditional form of measurement. They argued that foreign competition was a much more important check on American dominance than previously understood. If foreign firms were already making not insignificant sales into the United States, they argued, this showed that they had overcome any barriers to sales into the United States. Moreover, unlike domestic rivals of possibly dominant U.S. firms, who are probably already selling substantially all of their output in the United States, foreign firms can and probably will (they said) use their excess capacity for sales into the United States and divert most of their output to the United States when an artificial price rise by U.S. incumbents creates a profit opportunity. Accordingly, Landes and Posner proposed that, at least when products are standardized, the entire capacity of such foreign firms should be included in the market. Where foreign producers were in the background, the proposal seemed to "prove" that U.S. firm(s) had no market power, and, therefore, agreements between U.S. firms (for example, agreements to merge) would seldom be appropriate targets for antitrust enforcement.
Law and economics professor George Hay, FTC economist John C. Hilke, and consulting economist Philip B. Nelson have performed an empirical analysis to test Landes and Posner's assumption of the free flow of foreign competition. They observed that the increase in the value of the dollar vis-à-vis the foreign currency would create the same incentives as a monopolistic price increase and that the Landes-Posner theory would predict that such an exchange-rate change would trigger a surge of imports. Hay, Hilke, and Nelson tested this hypothesis and found it not to be confirmed. A surge in imports did not occur when the value of the dollar rose. In several industries studied, imports declined even as the value of the dollar rose. Thus, Hay, Hilke, and Nelson counsel caution in assuming that mere potentiality of imports negates domestic market power. 5