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Failing Firm Defence With Entry Deterrence

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  • Alessandro Fedele
  • Massimo Tognoni

Abstract

Under the principle of the Failing Firm Defense (FFD) a merger that would be blocked due to its harmful effect on competition could be nevertheless allowed when (i) the acquired firm is actually failing, (ii) there is no less anti-competitive alternative offer of purchase, (iii) absent the merger, the assets to be acquired would exit the market. We focus on potential anti-competitive effects of a myopic application of the third requirement by studying consequences of a horizontal merger on entry in a Cournot oligopoly with a failing firm. If the merger is blocked entry occurs and, when the industry is highly concentrated, consumer welfare is bigger because gains due to augmented competition exceed losses due to shortage of output.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 62 (2010)
Issue (Month): 4 (October)
Pages: 365-386

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Handle: RePEc:bla:buecrs:v:62:y:2010:i:4:p:365-386

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References

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  1. Lars Persson, 2005. "The Failing Firm Defense," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 175-201, 06.
  2. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
  3. Massimo MOTTA & Helder VASCONCELOS, 2003. "Efficiency Gains and Myopic Antitrust Authority in a Dynamic Merger Game," Economics Working Papers ECO2003/23, European University Institute.
  4. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
  5. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, October.
  6. Mason, Robin & Weeds, Helen, 2002. "The Failing Firm Defence: Merger Policy and Entry," CEPR Discussion Papers 3664, C.E.P.R. Discussion Papers.
  7. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  8. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
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Cited by:
  1. Barnard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," TEPP Working Paper 2010-19, TEPP.
  2. Beschorner, Patrick Frank Ernst, 2008. "Do Consumers Benefit from Concentration in the New Economy? A Review of Google's Mergers, Acquisitions, and Arrangements," ZEW Discussion Papers 08-121, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. repec:tep:teppwp:wp1019 is not listed on IDEAS
  4. Bernard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," Working Papers halshs-00812086, HAL.

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