Working Paper: CEPR ID: DP3664
Authors: Robin Mason; 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.
Keywords: Entry; Exit; Failing Firm Defence; Merger Policy
JEL Codes: D81; K21; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lenient merger policies (L49) | increased market entry (D40) |
| increased market entry (D40) | overall welfare improvements (I31) |
| lenient merger policies (L49) | increased expected profitability of entering the market (L11) |
| increased expected profitability of entering the market (L11) | increased market entry (D40) |