Welfare Effects of the Failing Firms Defence

Abstract: The failing firm defence is a tool that an antitrust authority can use to approve a merger that usually would have been blocked if one of the merging firms is failing. The defence has during the last years been used a number of times on EU level as well as in Sweden. This thesis explains how the Cournot model can be used to analyse the failing firm defence. It also presents and discuss’ literature that analyse how the failing firm defence affects welfare. The primary conclusion is that allowing an acquisition of a failing firm increases welfare when the acquirer reduces its marginal cost as a result of the merger. For welfare to be maximised, antitrust authorities should compare the market structures that emerge when different firms acquires the failing firm and let the firm that maximises welfare as the acquirer be the firm that acquires the failing firm. It is also important that the antitrust authority investigates if the failure of the failing firm is the result of predatory conduct by the acquiring firm, and blocks the merger if that is the case.