Efficiency Defense and Administrative Fuzziness in Merger Regulation

Abstract

Inclusion of an efficiency defense brings about an asymmetric information problem between an antitrust agency and merging firms concerning efficiencies due to mergers. Effort level and merger type determine the probability of producing the evidence that efficiencies satisfy a consumer welfare standard. The agency minimizes mistakes in its decisions. The model explains the presence of a fuzzy approval rule, i.e. approval probabilities between zero and one. If type I and type II mistakes are perfect substitutes, then only under strict restrictions on exogenous parameters fuzziness is welfare enhancing. If the agency can commit to certain policies or mistakes are non-perfect substitutes, then a fuzzy rule is preferred under wider range of parameters.