The Failing Firm Defence: Merger Policy and Entry
AbstractThis 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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Bibliographic InfoPaper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 148.
Date of creation: 04 Jun 2003
Date of revision:
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merger policy; failing firm defence; entry; exit;
Other versions of this item:
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
- K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-16 (All new papers)
- NEP-ENT-2003-06-16 (Entrepreneurship)
- NEP-LAW-2003-06-16 (Law & Economics)
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