Competition Policy and Financial Distress

27 Pages Posted: 11 Mar 2010  

Date Written: March 9, 2010

Abstract

Traditional analyses of competition policy assume that firms operate in perfect credit markets. We argue that imperfections in credit markets should be taken into account, and show one channel by which accounting for financial conditions could alter the welfare effects of a merger. In line with empirical evidence, we posit that the presence of financial distress might diminish price competition by reducing firms' willingness to undertake long-term investments in their customer base. Mergers that reduce the probability of financial distress can induce the merging firms to compete more fiercely for customers, thus partly offsetting the traditional effects of an increase in market power. We use this framework to derive implications for competition policy.

Keywords: Financial Distress, Competition Policy,Merger Analysis, Switching Costs

JEL Classification: K20, L40

Suggested Citation

Friedman, Ezra and Ottaviani, Marco, Competition Policy and Financial Distress (March 9, 2010). Northwestern Law & Economics Research Paper No. 10-08. Available at SSRN: https://ssrn.com/abstract=1567743 or http://dx.doi.org/10.2139/ssrn.1567743

Ezra Friedman (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

Marco Ottaviani

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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