Monday, March 22, 2010
Posted by D. Daniel Sokol
Ezra Friedman (Yale University - Department of Economics) and Marco Ottaviani (Northwestern - Kellogg) have an interesting new piece on Competition Policy and Financial Distress.
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.