Failing Firm Analysis and the Current Economic Downturn

This is not the first time, even in recent memory, that large numbers of firms in our economy were suffering from a severe economic downturn. During the Great Recession that began in 2008 a similar situation arose. At that time, many observers were calling for more lenient treatment of mergers proposed by firms in economic distress. Today, some in Congress are arguing for the exact opposite. In this brief note I revisit some of the issues raised by the failing — and flailing — firm defenses in times of severe economic distress, discuss certain nuances that may be specific to our current circumstances, and briefly sketch an approach that may be useful in helping competition agencies navigate these timely issues in circumstances where theory may be sound and generally agreed upon, but where information and evidence are subject to significant uncertainty.

By Ken Heyer¹

I. INTRODUCTION

This is not the first time, even in recent memory, that large numbers of firms in our economy suffer from a severe economic downturn. During the Great Recession that began in 2008 a similar situation arose. At that time, many observers were calling for more lenient treatment of mergers proposed by firms in economic distress. Today, some in Congress are arguing for the exact opposite.

In a paper published in November 2009 by Competition Policy International, Sheldon Kimmel and I addressed the issue and concluded as follows:

In recessions, we expect to see an increase in both the n