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The Failing Firm Defence: Merger Policy and Entry

Author

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  • Mason, Robin

    (University of Southampton)

  • 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.

Suggested Citation

  • Mason, Robin & Helen Weeds, 2003. "The Failing Firm Defence: Merger Policy and Entry," Royal Economic Society Annual Conference 2003 148, Royal Economic Society.
  • Handle: RePEc:ecj:ac2003:148
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    References listed on IDEAS

    as
    1. Rasmusen, Eric, 1988. "Entry for Buyout," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 281-299, March.
    2. Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," Review of Economic Studies, Oxford University Press, vol. 52(3), pages 383-401.
    3. Helen Weeds, 2002. "Strategic Delay in a Real Options Model of R&D Competition," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 729-747.
    4. Mason, Robin & Weeds, Helen, 2001. "Irreversible Investment with Strategic Interactions," CEPR Discussion Papers 3013, C.E.P.R. Discussion Papers.
    5. 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 549-569, May.
    6. 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.
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    Cited by:

    1. Alessandro Fedele & Massimo Tognoni, 2010. "Failing Firm Defence With Entry Deterrence," Bulletin of Economic Research, Wiley Blackwell, vol. 62(4), pages 365-386, October.
    2. Helder Vasconcelos, 2013. "Can the failing firm defence rule be counterproductive?," Oxford Economic Papers, Oxford University Press, vol. 65(2), pages 567-593, April.
    3. Patrice Bougette & Florent Venayre, 2008. "Contrôles a priori et a posteriori des concentrations : comment augmenter l'efficacité des politiques de concurrence," Revue d'économie industrielle, De Boeck Université, vol. 0(1), pages 9-40.
    4. Bernard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," Working Papers halshs-00812086, HAL.
    5. Huisman, K.J.M. & Kort, P.M. & Pawlina, G. & Thijssen, J.J.J., 2003. "Strategic Investment Under Uncertainty : Merging Real Options with Game Theory," Discussion Paper 2003-6, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

    merger policy; failing firm defence; entry; exit;

    JEL classification:

    • 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

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