The Failing Firm Defence: Merger Policy and Entry

44 Pages Posted: 15 Jan 2003

See all articles by Robin A. Mason

Robin A. Mason

University of Southampton - Division of Economics; Centre for Economic Policy Research (CEPR)

Helen Weeds

affiliation not provided to SSRN

Date Written: November 2002

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: Merger policy, failing firm defence, entry, exit

JEL Classification: D81, K21, L41

Suggested Citation

Mason, Robin and Weeds, Helen F., The Failing Firm Defence: Merger Policy and Entry (November 2002). CEPR Discussion Paper No. 3664. Available at SSRN: https://ssrn.com/abstract=369521

Robin Mason (Contact Author)

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom
+44 23 8059 3268 (Phone)
+44 23 8059 3858 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Helen F. Weeds

affiliation not provided to SSRN

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