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The merger paradox and why aspiration levels let it fail in the laboratory

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  • Huck, S.
  • Konrad, K.A.
  • Müller, W.

    (Tilburg University)

  • Normann, H.T.

Abstract

We study the merger paradox, a relative of Harsanyi's bargaining paradox, in an experiment. We examine bilateral mergers in experimental Cournot markets with initially three or four firms. Standard Cournot-Nash equilibrium predicts total outputs well. However, merged firms produce significantly more output than their competitors. As a result, mergers are not unprofitable. By analysing control treatments, we provide an explanation for these results based on the notion of aspiration levels, and show that the same logic also operates when a new firm enters a market. These results have some general consequences for adaptive play in changing environments. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

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Bibliographic Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-193645.

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Date of creation: 2007
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Publication status: Published in Economic Journal (2007) v.117, p.1073-1095
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-193645

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Web page: http://www.tilburguniversity.edu/

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Cited by:
  1. Siegfried Berninghaus & Werner Güth & M. Levati & Jianying Qiu, 2011. "Satisficing search versus aspiration adaptation in sales competition: experimental evidence," International Journal of Game Theory, Springer, vol. 40(1), pages 179-198, February.
  2. Mark Armstrong & Steffen Huck, 2010. "Behavioral Economics as Applied to Firms: A Primer," CPI Journal, Competition Policy International, vol. 6.
  3. Konrad, Kai A., 2010. "Merger profitability in industries with brand portfolios and loyal customers," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2010-08, Social Science Research Center Berlin (WZB).
  4. Huck, S. & Konrad, K.A. & Müller, W., 2005. "Merger Without Costs Advantage," Discussion Paper 2005-019, Tilburg University, Tilburg Law and Economic Center.
  5. Goppelsroeder, Marie, 2009. "Entry in Collusive Markets: An Experimental Study," MPRA Paper 14707, University Library of Munich, Germany.
  6. Burkhard C. Schipper & Philippe Raab, 2006. "Cournot Competition between Teams: An Experimental Study," Working Papers 626, University of California, Davis, Department of Economics.
  7. Jordi Brandts & Ayça Ebru Giritligil, 2006. "Entry and Market Selection of Firms: A Laboratory Study," Working Papers 299, Barcelona Graduate School of Economics.
  8. Shakun Datta Mago & Emmanuel Dechenaux, 2009. "Price leadership and firm size asymmetry: an experimental analysis," Experimental Economics, Springer, vol. 12(3), pages 289-317, September.

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