A Framework for Analyzing the Antitrust Safety Zone

The idea of antitrust “safety zone”is stated in the Antitrust Guidelines by the U.S. Department of Justice and the FTC. Antitrust agencies, in principle, will not intervene in market activities if the degree of market power is within the safety zone. There is, however, no solid economic rationale for the precise degree of market power that can justify this safety zone. I propose a model that can give practical guidance on the antitrust safety zone. I in particular focus socalled competition-restricting activities by the incumbent such as advertising, political lobbying, protection of innovations through patents, creation of excess capacity, coalition formation etc. where increasing returns exist and study its impact on the market power balance between the incumbent and a competitive fringe in a dynamic-competition framework. The model can derive a threshold level of market-power balance between them; above the threshold, the market tends towards monopoly; below the threshold, it tends toward competition in the long run. Antitrust agencies might describe the region below the threshold as the “safety zone”. JEL codes: L10, L20 & L40