Failing Firm Defense with Entry Deterrence

Under the principle of the Failing Firm Defense (FFD) a merger that would be blocked due to its harmful effect on competition could be nevertheless allowed when (i) the acquired firm is actually failing, (ii) there is no less anti-competitive alternative purchase, (iii) absent the merger, the assets to be acquired would exit the market. This paper focuses on potential anti-competitive effects of a myopic application of the third requirement by studying consequences of a horizontal merger on entry in a Cournot oligopoly with a failing firm. If the merger is blocked, entry occurs and consumer welfare is bigger when the industry is highly concentrated because gains due to augmented competition exceed losses due to shortage of output.