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The Insiders’ Dilemma: An Experiment on Merger Formation

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Author Info

  • Tobias Lindqvist

    ()

  • Johan Stennek

    ()

Abstract

This paper tests the insiders’ dilemma hypothesis in a laboratory experiment. The insiders’ dilemma means that a profitable merger does not occur, because it is even more profitable for each firm to unilaterally stand as an outsider (Stigler, 1950; Kamien and Zang, 1990, 1993). The experimental data provides support for the insiders’ dilemma, and thereby for endogenous rather than exogenous merger theory. More surprisingly, our data suggests that fairness (or relative performance) considerations also make profitable mergers difficult. Mergers that should occur in equilibrium do not, since they require an unequal split of surplus. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s10683-005-1466-7
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Bibliographic Info

Article provided by Springer in its journal Experimental Economics.

Volume (Year): 8 (2005)
Issue (Month): 3 (September)
Pages: 267-284

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Handle: RePEc:kap:expeco:v:8:y:2005:i:3:p:267-284

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Web page: http://www.springerlink.com/link.asp?id=102888

Related research

Keywords: coalition formation; experiment; insiders’ dilemma; mergers; antitrust;

References

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  1. Horn, Henrik & Persson, Lars, 2001. "Endogenous mergers in concentrated markets," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1213-1244, September.
  2. Davis, Douglas D., 2002. "Strategic interactions, market information and predicting the effects of mergers in differentiated product markets," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1277-1312, November.
  3. Morton I. Kamien & Israel Zang, 1988. "The Limits of Monopolization Through Acquisition," Discussion Papers 802, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Fridolfsson, Sven-Olof & Stennek, Johan, 2005. "Hold-up of anti-competitive mergers," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 753-775, December.
  5. Armando Gomes, . "A Theory of Negotiation and Formation of Coalition," CARESS Working Papres 99-12, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  6. Fridolfsson, Sven-Olof & Stennek, Johan, 2000. "Why Event Studies Do Not Detect Anti-Competitive Mergers," Working Paper Series 542, Research Institute of Industrial Economics.
  7. Steffen Huck & Hans-Theo Normann & Joerg Oechssler, 1998. "Does information about competitors' actions increase or decrease competition in experimental oligopoly markets?," Industrial Organization 9803004, EconWPA.
  8. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  9. Szidarovszky, F. & Yakowitz, S., 1982. "Contributions to Cournot oligopoly theory," Journal of Economic Theory, Elsevier, vol. 28(1), pages 51-70, October.
  10. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
  11. Morton I. Kamien & Israel Zang, 1988. "Competitively Cost Advantageous Mergers and Monopolization," Discussion Papers 799, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  12. repec:fth:iniesr:542 is not listed on IDEAS
  13. Kamien, Morton I & Zang, Israel, 1993. "Monopolization by Sequential Acquisition," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 205-29, October.
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Citations

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Cited by:
  1. José Apesteguia & Martin Dufwenberg & Reinhard Selten, 2003. "Blowing the Whistle," Bonn Econ Discussion Papers bgse9_2003, University of Bonn, Germany.
  2. Fumagalli, Eileen & Nilssen, Tore, 2008. "Waiting to Merge," Memorandum 13/2008, Oslo University, Department of Economics.
  3. Granier, Laurent & Podesta, Marion, 2010. "Bundling and Mergers in Energy Markets," Energy Economics, Elsevier, vol. 32(6), pages 1316-1324, November.
  4. James Gaisford & Stefan Lutz, 2007. "A Multi-Product Framework Generating Waves of Mergers and Divestitures," ICER Working Papers 36-2007, ICER - International Centre for Economic Research.
  5. Lindqvist, Tobias, 2004. "Mergers by Partial Acquisition," Working Paper Series 630, Research Institute of Industrial Economics.

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