The Failing Firm Defense

27 Pages Posted: 8 Jun 2005

See all articles by Lars Persson

Lars Persson

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)


This paper evaluates the welfare consequences of the failing firm defense (FFD) in the EU and U.S. merger laws. To this end, I combine an oligopoly model with an 'endogenous valuations' auction model. The FFD is shown to work reasonably well for consumers unless small firms are too small. The FFD may, however, lead to total surplus losses, due to a 'least danger to competition' (LDC) condition which favors small, and thus possibly inefficient, firms. It is also shown that, in a multi-firm setting, the FFD increases the incentive for predation only when the assets are industry-specific.

Suggested Citation

Persson, Lars, The Failing Firm Defense. Journal of Industrial Economics, Vol. 53, No. 2, pp. 175-201, June 2005, Available at SSRN:

Lars Persson (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15

Centre for Economic Policy Research (CEPR)

United Kingdom

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