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Merger Incentives and the Failing Firm Defense

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  • Jan Bouckaert
  • Peter M. Kort

Abstract

type="main"> The merger incentives between profitable firms differ fundamentally from the incentives of a profitable firm to merge with a failing firm. We investigate these incentives under different modes of price competition and Cournot behavior. Our main finding is that firms strictly prefer exit of the failing firm to acquisition. This result may imply that other than strategic reasons, like economies of scale, must be looked for to understand why firms make use of the failing firm defense. However, when products are sufficiently heterogenous, we find that (i) the failing firm defense can be welfare enhancing and (ii) a government bail-out increases total welfare when the number of firms is sufficiently low.

Suggested Citation

  • Jan Bouckaert & Peter M. Kort, 2014. "Merger Incentives and the Failing Firm Defense," Journal of Industrial Economics, Wiley Blackwell, vol. 62(3), pages 436-466, September.
    • Handle: RePEc:bla:jindec:v:62:y:2014:i:3:p:436-466
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    Cited by:

    1. Krämer, Jan & Schnurr, Daniel, 2018. "Margin squeeze regulation and infrastructure competition," Information Economics and Policy, Elsevier, vol. 45(C), pages 30-46.

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