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Failing Firm Defense with Entry Deterrence

  • Alessandro Fedele
  • Massimo Tognoni

Under the principle of the Failing Firm Defense (FFD) a merger that would be blocked due to its harmful effect on competition could be nevertheless allowed when (i) the acquired firm is actually failing, (ii) there is no less anti-competitive alternative offer of purchase, (iii) absent the merger, the assets to be acquired would exit the market. We focus on potential anti-competitive effects of a myopic application of the third requirement by studying consequences of a horizontal merger on entry in a Cournot oligopoly with a failing firm. If the merger is blocked entry occurs and, when the industry is highly concentrated, consumer welfare is bigger because gains due to augmented competition exceed losses due to shortage of output.

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File URL: http://www.statistica.unimib.it/utenti/WorkingPapers/WorkingPapers/20061002.pdf
File Function: First version, October 2006
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Paper provided by Università degli Studi di Milano-Bicocca, Dipartimento di Statistica in its series Working Papers with number 20061002.

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Length: 20 pages
Date of creation: Oct 2006
Date of revision: Oct 2006
Handle: RePEc:mis:wpaper:20061002
Contact details of provider: Postal: Via Bicocca degli Arcimboldi 8, 20126 Milano
Web page: http://www.statistica.unimib.it
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  1. repec:cup:cbooks:9780521816632 is not listed on IDEAS
  2. Motta, Massimo & Vasconcelos, Helder, 2004. "Efficiency Gains and Myopic Antitrust Authority in a Dynamic Merger Game," CEPR Discussion Papers 4175, C.E.P.R. Discussion Papers.
  3. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  4. Mason, Robin & Weeds, Helen, 2002. "The Failing Firm Defence: Merger Policy and Entry," CEPR Discussion Papers 3664, C.E.P.R. Discussion Papers.
  5. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
  6. repec:cup:cbooks:9780521016919 is not listed on IDEAS
  7. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
  8. Lars Persson, 2005. "The Failing Firm Defense," Journal of Industrial Economics, Wiley Blackwell, vol. 53(2), pages 175-201, 06.
  9. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
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