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Merger Policy, Entry, and Entrepreneurship

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  • Robin Mason
  • Helen Weeds

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Abstract

We assess the impact of merger policy on entry and entrepreneurship. Facing uncertainty about its prospects and foreseeing that it may wish to quit should profitability prove poor, a rational entrant considers possible exit routes. Horizontal merger reduces competition subsequently, lowering welfare in the short run, but also provides a valuable exit route. By facilitating exit and thus raising the value of entry, more lenient merger policy may stimulate entry sufficiently that welfare is increased overall. We calculate the optimal merger policy in the form of a low, but positive, profitability threshold below which a merger is permitted despite its adverse impact on post-merger competition. This may be viewed as an extension of the "failing firm defence" to include ailing, low profitability firms as well as imminently failing ones. The implications of strategic firm behaviour for the optimal policy are examined, and merger policy is compared with an entry subsidy.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 634.

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Date of creation: 17 Aug 2007
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Handle: RePEc:esx:essedp:634

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  1. Spector, David, 2003. "Horizontal mergers, entry, and efficiency defences," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1591-1600, December.
  2. Anthony M. Marino & J�N Z�Bojn�K, 2006. "Merger, Ease Of Entry And Entry Deterrence In A Dynamic Model," Journal of Industrial Economics, Wiley Blackwell, vol. 54(3), pages 397-423, 09.
  3. John Armour & Douglas Cumming, 2005. "Bankruptcy Law and Entrepreneurship," ESRC Centre for Business Research - Working Papers wp300, ESRC Centre for Business Research.
  4. Neven, Damien J & Röller, Lars-Hendrik, 2000. "Consumer Surplus vs. Welfare Standard in a Political Economy Model of Merger Control," CEPR Discussion Papers 2620, C.E.P.R. Discussion Papers.
  5. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  6. Lars Persson, 2005. "The Failing Firm Defense," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 175-201, 06.
  7. Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, December.
  8. Kamien, Morton I & Zang, Israel, 1990. "The Limits of Monopolization through Acquisition," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 465-99, May.
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