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Merger Policy, Entry, and Entrepreneurship

Mason, Robin and Weeds, Helen (2007) Merger Policy, Entry, and Entrepreneurship. Working Paper. University of Essex, Department of Economics Discussion Papers 634.

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Abstract

We assess the impact of merger policy on entry and entrepreneurship. Facing uncertainty about its prospects and foreseeing that it may wish to quit should profitability prove poor, a rational entrant considers possible exit routes. Horizontal merger reduces competition subsequently, lowering welfare in the short run, but also provides a valuable exit route. By facilitating exit and thus raising the value of entry, more lenient merger policy may stimulate entry sufficiently that welfare is increased overall. We calculate the optimal merger policy in the form of a low, but positive, profitability threshold below which a merger is permitted despite its adverse impact on post-merger competition. This may be viewed as an extension of the 'failing firm defence' to include ailing, low profitability firms as well as imminently failing ones. The implications of strategic firm behaviour for the optimal policy are examined, and merger policy is compared with an entry subsidy.

Item Type: Monograph (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 17 Jul 2012 23:55
Last Modified: 28 Aug 2014 10:28
URI: http://repository.essex.ac.uk/id/eprint/3061

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