Efficiency Defence, Administrative Fuzziness, and Commitment in Merger Regulation

This paper develops a signalling model to look at some effects of the inclusion of an efficiency defence in merger regulation. By incorporating Type I and Type II errors into the antitrust agency's pay-off function approval probabilities are endogenized. The agency can choose to use a fuzzy approval rule (mixed strategies) after observing a double signal (produced evidence and the way it has been produced) as a tool to (partially) separate different merger types by changing approval probabilities and, consequently, firms' expected payoffs from a merger. The separation leads to a lower value of the expected mistake by the agency. If the agency can commit to certain policies, then a fuzzy approval rule is preferred under a wide range of parameters.