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Merger incentives and the failing firm defense

Journal Contribution - Journal Article

The merger incentives between profitable firms differ fundamentally from the incentives of a profitable firm to merge with a failing firm. We investigate these incentives under different modes of price competition and Cournot behavior. Our main finding is that firms strictly prefer exit of the failing firm to acquisition. This result may imply that other than strategic reasons, like economies of scale, must be looked for to understand why firms make use of the failing firm defense. However, when products are sufficiently heterogenous, we find that (i) the failing firm defense can be welfare enhancing and (ii) a government bail-out increases total welfare when the number of firms is sufficiently low.
Journal: The journal of industrial economics
ISSN: 0022-1821
Volume: 62
Pages: 436 - 466
Publication year:2014
Keywords:A1 Journal article
BOF-keylabel:yes
BOF-publication weight:1
CSS-citation score:1
Authors:International
Authors from:Higher Education
Accessibility:Open