Merger incentives and the failing firm defense

J.M.C. Bouckaert, P.M. Kort

Research output: Contribution to journalArticleScientificpeer-review

3 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)436-466
Number of pages30
JournalJournal of Industrial Economics
Volume62
Issue number3
DOIs
Publication statusPublished - 9 Jan 2014

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