Competition policy and financial distress

This paper analyzes the impact of financial distress on the welfare consequences of mergers among firms with market power. 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 off setting the traditional effects of an increase in market power. We use this framework to derive implications for competition policy.