In 1960, olin and pennsalt formed a joint venture the Penn – olin chemical company for the production of sodium chlorate. Each parent firm owned 60 per cent of the offspring’s stock in 1961, Penn – olin began operating a new plant in Calvert city, Kentucky. The plant had a capacity of 26,500 tons per year. Discussion: as this incident shows a decision on entry of or expansion involves a careful consideration of market conditions, including they likely reactions of firms already in that market and of other potential entrants. It is often the case – as here – that the most likely entrants are firms that already operate in related product or geographic markets.

A special feature of this case study is the actual entry of a joint venture formed as a wholly owned subsidiary of two independent parent firms. The point venture resulted in the actual entry of a new firm but eliminated the possibility of competition between the two parent firms. If the joint venture had been prohibited, at least two potential entrants would have remained poised on the edge of the market. Conceivably, one of the two parent firms might have come into the market on its own, with the other remaining as a potential competitor. The policy question is whether or not the actual competition offered by the joint venture is worth the loss of potential competition it engenders.

The government challenged the formation of the joint venture. Penn – olin, as a violation of section7 of the Clayton act which prohibits mergers that have the effect of essening competition. The district cort ruled that section 7 did not apply to joint ventures. It sent the case back to the district court with instructions to decide if either of the parent firms would have entered alone, with the other remaining as a potential competitor. In a dissenting opinion, Justice William o Douglas sharply disagreed among the parent firms to decide the market, and the thought this enough of a lessening of competition to violate section 7 of the Clayton act. Subsequently the district court found no reasonable probability that either parent firm would have entered on its own and allowed the joint venture.