Document Type
Working Paper
Repository Date
2010
Keywords
Financial Distress, Competition Policy, Merger Analysis, Switching Costs
Subject Categories
Antitrust and Trade Regulation | Law
Abstract
Traditional analyses of competition policy assume that firms operate in perfect credit markets. We argue that imperfections in credit markets should be taken into account, and show one channel by which accounting for financial conditions could alter the welfare effects of a merger. In line with empirical evidence, we posit that the presence of financial distress might diminish price competition by reducing firms' willingness to undertake long-term investments in their customer base. Mergers that reduce the probability of financial distress can induce the merging firms to compete more fiercely for customers, thus partly offsetting the traditional effects of an increase in market power. We use this framework to derive implications for competition policy.
Repository Citation
Friedman, Ezra and Ottaviani, Marco Ottaviani, "Competition Policy and Financial Distress" (2010). Faculty Working Papers. 36.
https://scholarlycommons.law.northwestern.edu/facultyworkingpapers/36
