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The Regulation of Predatory Firms

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  • Antoine Faure‐Grimaud

Abstract

This article investigates the issue of predation by a regulated firm. Since it has private information, a regulated firm obtains higher rents in case of successful predation: the fewer the competitors, the higher the marginal social value of the regulated firm's effort and the higher the informational rents. Both principals (the investor of a “target” firm and the regulator) have to provide some incentives to prevent predation: the investor has to reduce the sensitivity of refinancing to predation; the regulator has to lower the gain of successful predation. It is shown that there is a trade‐off between the power of the regulatory incentive scheme and the regulated firm's incentives to prey. In addition, as deterring predation is costly, the investor and the regulator compete when offering contracts: each wants to free‐ride on the other. Hence, predation may occur in equilibrium although it makes both principals worse off.

Suggested Citation

  • Antoine Faure‐Grimaud, 1997. "The Regulation of Predatory Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 425-451, June.
    • Handle: RePEc:bla:jemstr:v:6:y:1997:i:1:p:425-451
    DOI: 10.1111/j.1430-9134.1997.jems0697_425.x
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    Cited by:

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    2. Ingela Alger, 2006. "Optimal Debt Contracts when Credit Managers are (Perhaps) Corruptible," Boston College Working Papers in Economics 648, Boston College Department of Economics.
    3. Arping, Stefan & Diaw, Khaled M., 2008. "Sunk costs, entry deterrence, and financial constraints," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 490-501, March.
    4. Fernandez-Ruiz, Jorge, 2004. "Predation due to adverse selection in financial markets," International Journal of Industrial Organization, Elsevier, vol. 22(5), pages 715-733, May.
    5. Aldo González Tissinetti, 2006. "Antitrust and Regulation, Complements or Substitutes? The Case of a Vertically Integrated Firm," Working Papers wp225, University of Chile, Department of Economics.
    6. Arve, Malin, 2014. "Procurement and predation: Dynamic sourcing from financially constrained suppliers," Journal of Public Economics, Elsevier, vol. 120(C), pages 157-168.

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