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Weddings with Uncertain Prospects – Mergers under Asymmetric Information

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  • Thomas Borek
  • Stefan Buehler

    ()
    (Socioeconomic Institute, University of Zurich)

  • Armin Schmutzler

    ()
    (Socioeconomic Institute, University of Zurich)

Abstract

We provide a framework for analyzing bilateral mergers when there is two-sided asymmetric information about firms’ types. We show that there is always a "no-merger" equilibrium where firms do not consent to a merger, irrespective of their type. There may also be a "cut-off" equilibrium if the expected merger returns satisfy a suitable single crossing condition, which will hold if a firm’s merger returns are "essentially monotone decreasing" in its type. Applying our analysis to the linear Cournot model, we show how the merger pattern depends on the cost effects of mergers, the extent of uncertainty, and the way profits are split. Specifically, we show how increasing uncertainty about competitor types may foster mergers as firms hope for strong rationalization effects.

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File URL: http://www.soi.uzh.ch/research/wp/2002/wp0213.pdf
File Function: Revised version, 2004
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Bibliographic Info

Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0213.

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Length: 35 pages
Date of creation: Nov 2002
Date of revision: Feb 2004
Handle: RePEc:soz:wpaper:0213

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Keywords: merger; asymmetric information; oligopoly; single crossing;

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  1. Hviid, Morten & Prendergast, Canice, 1993. "Merger Failure and Merger Profitability," Journal of Industrial Economics, Wiley Blackwell, vol. 41(4), pages 371-86, December.
  2. Barros, Pedro Pita, 1998. "Endogenous mergers and size asymmetry of merger participants," Economics Letters, Elsevier, vol. 60(1), pages 113-119, July.
  3. Athey, S., 1996. "Characterizing Properties of Stochastic Objective Functions," Working papers 96-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Healy, Paul M. & Palepu, Krishna G. & Ruback, Richard S., 1992. "Does corporate performance improve after mergers?," Journal of Financial Economics, Elsevier, vol. 31(2), pages 135-175, April.
  5. Borek, Thomas & Bühler, Stefan & Schmutzler, Armin, 2003. "Weddings with Uncertain Prospects - Mergers under Asymmetric Information," CEPR Discussion Papers 3839, C.E.P.R. Discussion Papers.
  6. 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.
  7. Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
  8. Athey, S., 1997. "Sigle Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Working papers 97-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Gal-Or, Esther, 1988. "The Informational Advantages or Disadvantages of Horizontal Mergers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 639-61, November.
  10. Philippe Jehiel & Benny Moldovanu, 1998. "Auctions with Downstream Interaction," Discussion Papers 1243, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Ravenscraft, David J. & Scherer, F. M., 1989. "The profitability of mergers," International Journal of Industrial Organization, Elsevier, vol. 7(1), pages 101-116, March.
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