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Merger policy, entry, and entrepreneurship

  • Mason, Robin
  • Weeds, Helen

We assess the impact of merger policy on entry and entrepreneurship. When faced with uncertainty about its prospects, and foreseeing that it may wish to leave the market should profitability prove poor, a rational entrant considers possible exit routes. Horizontal merger reduces competition post-merger which, all else being equal, lowers welfare; but merger 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 merger is permitted despite the 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. Merger policy is compared with an entry subsidy, and the implications of strategic firm behaviour for the choice of merger policy are also examined.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 57 (2013)
Issue (Month): C ()
Pages: 23-38

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Handle: RePEc:eee:eecrev:v:57:y:2013:i:c:p:23-38
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. repec:cup:cbooks:9780521816632 is not listed on IDEAS
  2. 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.
  3. John Armour & Douglas Cumming, 2008. "Bankruptcy Law and Entrepreneurship," American Law and Economics Review, Oxford University Press, vol. 10(2), pages 303-350.
  4. 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.
  5. repec:cup:cbooks:9780521016919 is not listed on IDEAS
  6. Lars Persson, 2005. "The Failing Firm Defense," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 175-201, 06.
  7. Neven, Damien J. & Roller, Lars-Hendrik, 2005. "Consumer surplus vs. welfare standard in a political economy model of merger control," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 829-848, December.
  8. Spector, David, 2003. "Horizontal mergers, entry, and efficiency defences," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1591-1600, December.
  9. 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.
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