Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 514: The Auctioning of a Failing Firm

Lars Persson ()
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Lars Persson: The Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: This paper evaluates the welfare consequences of the failing firm doctrine in the EU and US merger laws. I combine an oligopoly model with an "endogenous valuations" auction model. Thereby, I take into account that, in an oligopoly, a firm's willingness to pay for the assets depends on the identity of the alternative buyer. The main result is that the doctrine leads to cost inefficiencies, due to a "least danger to competition" (LDC) condition, which favors small, and thus inefficient, firms. In particular, the LDC condition implies that small firms can preempt acquisitions that would lead to both higher producer surplus and higher consumer surplus.

Keywords: Competition policy; Failing firm defense; Auction

JEL-codes: K21; L13; L41

32 pages, November 23, 1998

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