Upstream Market Power and Failing Firm Acquisitions

This study analyzes the conditions under which failing firm acquisitions arise endogenously and examines their welfare effects. We consider a vertical market structure in which an upstream firm supplies a common input to multiple independent downstream markets. We show that acquiring a failing downstream firm preserves input demand in the market, and when the demand in that market is relatively elastic, it results in a lower input price. This input price effect gives rival firms an incentive to acquire a failing firm even in the absence of efficiency gains or direct synergies. We further demonstrate that failing firm acquisitions can increase both consumer surplus and total surplus by maintaining the supply of final goods and reducing input prices. These findings remain robust when the upstream market is oligopolistic and suggest that competition authorities should account for upstream market effects when evaluating the failing firm defense.