Resilience and Restructuring Merger Efficiencies in Declining Industries

Jorge Padilla, Roman Fischer and Kadambari Prasad recently authored an article examining restructuring efficiencies and merger resilience in declining industries. The authors argue that mergers can reduce the risk of costly, disorderly exit in industries prone to a war-of-attrition dynamic, and propose a disciplined framework for weighing this benefit in merger control.

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Abstract

This paper develops an economic framework for assessing restructuring efficiencies in horizontal merger control. In declining industries with high fixed costs, excess capacity and substantial exit barriers, decentralized closure decisions may generate a war of attrition: each producer waits for rivals to withdraw capacity first, losses accumulate, investment deteriorates and eventual exit occurs abruptly rather than smoothly. Standard merger analysis may mischaracterize this process by treating continued independent operation as the counterfactual and by equating all capacity reduction with consumer harm. We distinguish orderly restructuring against prolonged zombie survival and disorderly exit, and model the merger's resilience benefit as the reduction in probability-weighted consumer losses from disruption. The model shows that where consumer costs under orderly adjustment are approximately the same with and without the merger, any reduction in the probability of disorderly exit is welfare enhancing. Where the merger increases orderly-state consumer costs, it remains procompetitive whenever the reduction in expected disorderly-exit losses exceeds that increase. The analysis provides a disciplined basis for recognizing restructuring efficiencies without converting merger control into open-ended industrial policy.