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Mergers under Asymmetric Information – Is there a Lemons Problem?

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Author Info
Thomas Borek
Stefan Buehler () (Socioeconomic Institute, University of Zurich)
Armin Schmutzler () (Socioeconomic Institute, University of Zurich)

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Abstract

We analyze a Bayesian merger game under two-sided asymmetric information about firm types. We show that the standard prediction of the lemons market model–if any, only low-type firms are traded–is likely to be misleading: Merger returns, i.e. the difference between pre- and post-merger profits, are not necessarily higher for low-type firms. This has two implications. First, under very general conditions, equilibria exist where mergers take place, and there is no presumption that there is ineffciently low trade. Second, in these equilibria it is typically not the case that only low-type firms enter an agreement.

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File URL: http://www.soi.uzh.ch/research/wp/2004/wp0408.pdf
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Publisher Info
Paper provided by University of Zurich, Socioeconomic Institute in its series Working Papers with number 0408.

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Length: 33 pages
Date of creation: Jul 2004
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Handle: RePEc:soz:wpaper:0408

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Related research
Keywords: merger asymmetric information oligopoly single crossing

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Boundaries of Public and Private Enterprise; Privatization; Contracting Out

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References listed on IDEAS
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  1. Barros, Pedro Pita, 1998. "Endogenous mergers and size asymmetry of merger participants," Economics Letters, Elsevier, vol. 60(1), pages 113-119, July. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Hviid, Morten & Prendergast, Canice, 1993. "Merger Failure and Merger Profitability," Journal of Industrial Economics, Blackwell Publishing, vol. 41(4), pages 371-86, December. [Downloadable!] (restricted)
  4. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-80, January. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
  7. Athey, Susan, 2001. "Single Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Econometrica, Econometric Society, vol. 69(4), pages 861-89, July.
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  8. Ravenscraft, David J. & Scherer, F. M., 1989. "The profitability of mergers," International Journal of Industrial Organization, Elsevier, vol. 7(1), pages 101-116, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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  2. Daniel Halbheer & Ernst Fehr & Lorenz Goette & Armin Schmutzler, 2007. "Self-Reinforcing Market Dominance," Working Papers 0711, University of Zurich, Socioeconomic Institute. [Downloadable!]
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  5. Gärtner, Dennis & Schmutzler, Armin, 2006. "Merger Negotiations and Ex-Post Regret," CEPR Discussion Papers 5911, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Stefan Boes & Markus Lipp & Rainer Winkelmann, 2005. "Money Illusion Under Test," Working Papers 0514, University of Zurich, Socioeconomic Institute. [Downloadable!]
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  7. Stefan Buehler & Armin Schmutzler, 2003. "Asymmetric Vertical Integration," Working Papers 0306, University of Zurich, Socioeconomic Institute, revised Nov 2004. [Downloadable!]
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  8. Stefan Boes, 2007. "Nonparametric Analysis of Treatment Effects in Ordered Response Models," Working Papers 0709, University of Zurich, Socioeconomic Institute. [Downloadable!]
  9. Harry Telser & Karolin Becker & Peter Zweifel, 2004. "Validity and Reliability of Willingness-to-Pay Estimates: Evidence from Two Overlapping Discrete-Choice Experiments," Working Papers 0412, University of Zurich, Socioeconomic Institute, revised Mar 2008. [Downloadable!]
  10. Harry Telser & Peter Zweifel, 2003. "Validity of Discrete-Choice Experiments - Evidence for Health Risk Reduction," Working Papers 0313, University of Zurich, Socioeconomic Institute, revised Feb 2005. [Downloadable!]
  11. Lukas Steinmann & Harry Telser & Peter Zweifel, 2005. "The Impact of Aging on Future Healthcare Expenditure," Working Papers 0510, University of Zurich, Socioeconomic Institute, revised Dec 2006. [Downloadable!]
  12. Simon Loertscher & Yves Schneider, 2005. "Switching Costs, Firm Size, and Market Structure," Working Papers 0508, University of Zurich, Socioeconomic Institute. [Downloadable!]
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  13. Stefan Buehler & Armin Schmutzler, 2005. "On The Role of Access Charges Under Network Competition," Working Papers 0501, University of Zurich, Socioeconomic Institute. [Downloadable!]
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