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Failing Firm Defense with Entry Deterrence

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  • A. Fedele
  • M. 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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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number 562.

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Date of creation: 2006
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Handle: RePEc:bol:bodewp:562

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  1. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
  2. 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.
  3. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  4. Lars Persson, 2005. "The Failing Firm Defense," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 175-201, 06.
  5. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, October.
  6. Motta, Massimo & Vasconcelos, Helder, 2005. "Efficiency gains and myopic antitrust authority in a dynamic merger game," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 777-801, December.
  7. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
  8. Mason, Robin & Helen Weeds, 2003. "The Failing Firm Defence: Merger Policy and Entry," Royal Economic Society Annual Conference 2003 148, Royal Economic Society.
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Cited by:
  1. repec:tep:teppwp:wp1019 is not listed on IDEAS
  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. Bernard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," Working Papers halshs-00812086, HAL.
  4. Barnard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," TEPP Working Paper 2010-19, TEPP.

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