The Failing Firm Defence: Merger Policy and Entry

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The Failing Firm Defence: Merger Policy and Entry

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Mason, Robin
Weeds, Helen

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Helen Weeds

Abstract

This Paper considers the 'failing firm defence'. Under this principle, found in most antitrust jurisdictions, a merger that would otherwise be blocked due to its adverse effect on competition is permitted when the firm to be acquired is a failing firm, and an alternative, less detrimental merger is unavailable. Competition authorities have shown considerable reluctance to accept the failing firm defence, and it has been successfully used in just a handful of cases. The Paper considers the defence in a dynamic setting with uncertainty. A firm entering a market also considers its ease of exit, foreseeing that it may later wish to leave should market conditions deteriorate. By facilitating exit in times of financial distress, the failing firm defence may encourage entry sufficiently that welfare is increased overall. This view of the defence has several implications relevant to a number of merger cases. The conditions under which greater leniency is welfare-improving are examined.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3664.

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Date of creation: Nov 2002
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Handle: RePEc:cpr:ceprdp:3664

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Paper
- Mason, Robin & Helen Weeds, 2003. "The Failing Firm Defence: Merger Policy and Entry," Royal Economic Society Annual Conference 2003 148, Royal Economic Society. [Downloadable!]

Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

This paper has been announced in the following NEP Reports:

NEP-ALL-2003-03-14 (All new papers)
NEP-LAW-2003-03-14 (Law & Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Fudenberg, Drew & Tirole, Jean, 1985. "Preemption and Rent Equilization in the Adoption of New Technology," Review of Economic Studies, Blackwell Publishing, vol. 52(3), pages 383-401, July. [Downloadable!] (restricted)
Rasmusen, Eric, 1988. "Entry for Buyout," Journal of Industrial Economics, Blackwell Publishing, vol. 36(3), pages 281-99, March. [Downloadable!] (restricted)
Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs," Econometrica, Econometric Society, vol. 56(3), pages 549-69, May. [Downloadable!] (restricted)
Other versions:
- J. Tirole & E. Maskin, 1982. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large-Fixed Costs," Working papers 320, Massachusetts Institute of Technology (MIT), Department of Economics.
Weeds, Helen, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 729-47, July.
Other versions:
- Weeds, H., 2000. "Strategic Delay in a Real Optimna Model of R&D Competition," The Warwick Economics Research Paper Series (TWERPS) 576, University of Warwick, Department of Economics. [Downloadable!]
Jacquemin, Alexis & Slade, Margaret E., 1989. "Cartels, collusion, and horizontal merger," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 7, pages 415-473 Elsevier. [Downloadable!] (restricted)
Garth Saloner, 1987. "Predation, Mergers, and Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 165-186, Summer. [Downloadable!] (restricted)
Mason, Robin & Weeds, Helen, 2001. "Irreversible Investment with Strategic Interactions," CEPR Discussion Papers 3013, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Kort, P.M. & Huisman, K.J.M. & Pawlina, G. & Thijssen, J.J., 2003. "Strategic investment under uncertainty: merging real options with game theory," Discussion Paper 6, Tilburg University, Center for Economic Research. [Downloadable!]

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