Mergers in declining industries: puzzles from competition and industrial policies

Exit strategies referred to specific industry characteristics have been widely studied in the economic literature (Harrigan, 1980; Ghemawat et al., 1985, 1990; Lieberman, 1990; Reynolds, 1988; Fundenberg et al., 1989; Baptista et al., 2006). These studies show that exit dynamics – by setting new boundaries and changing the dynamic of sectorial competition – may reallocate activities towards more efficient outcomes. In declining industries particularly exit strategies play a crucial role in granting efficiency. When demand declines, efficiency rules call out for a shrink in production capacity. We focus on M&A as a strategy of orderly exiting from a declining industry. We argue that merger strategies in such a context could represent an efficient solution to the attrition game. However, mergers often give rise to competitive concerns. This raises the question of how to reconcile the enforcement of competition rules with the need of mergers as efficient devices for orderly exiting from declining industries. We suggest a two-step approach to merger scrutiny that, beginning from market definition from both a competition law and industrial policy perspective, attempts to solve the trade-off between fostering competition and recovering from decline, thereby reducing the possibility of committing Type I and II errors in assessing the competitive impact of mergers.