Optimal 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 potentially efficient, taking market structure as given, e.g. it reduces her costs, then competitor suits can generate some post-entry competition without deterring this efficient cost-reduction. If the incumbent's action is inefficient, e.g. it increases the rival's costs (but does not reduce the incumbent's costs), then competitor suits (even with maximal antitrust liability) cannot deter the incumbent from increasing the rival's costs by at least a small amount. Thus, the paper suggests that while competitor suits have advantages for efficient actions that deter efficient entry, they do not work well for inefficient actions that deter entry.