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The Insiders' Dilemma: An Experiment on Merger Formation

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 (Kamien and Zang, 1990 and 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 considerations also make profitable mergers difficult. Mergers that should occur in equilibrium do not, since they require an unequal split of surplus.

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File URL: http://www2.ne.su.se/paper/wp01_08.pdf
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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2001:8.

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Length: 30 pages
Date of creation: 19 Sep 2001
Date of revision:
Handle: RePEc:hhs:sunrpe:2001_0008
Contact details of provider: Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
Phone: +46 8 16 20 00
Fax: +46 8 16 14 25
Web page: http://www.ne.su.se/
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  1. 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.
  2. Ernst Fehr & Klaus M. Schmidt, . "A Theory of Fairness, Competition and Cooperation," IEW - Working Papers 004, Institute for Empirical Research in Economics - University of Zurich.
  3. Horn, Henrik & Persson, Lars, 2001. "Endogenous mergers in concentrated markets," International Journal of Industrial Organization, Elsevier, vol. 19(8), pages 1213-1244, September.
  4. 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.
  5. Armando Gomes, . "A Theory of Negotiations and Formation of Coalitions," Rodney L. White Center for Financial Research Working Papers 21-99, Wharton School Rodney L. White Center for Financial Research.
  6. Kamien, Morton I. & Zang, Israel, 1991. "Competitively cost advantageous mergers and monopolization," Games and Economic Behavior, Elsevier, vol. 3(3), pages 323-338, August.
  7. Eckbo, B. Espen, 1983. "Horizontal mergers, collusion, and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 241-273, April.
  8. 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.
  9. Fridolfsson, Sven-Olof & Stennek, Johan, 2000. "Why Event Studies Do Not Detect Anti-Competitive Mergers," Working Paper Series 542, Research Institute of Industrial Economics.
  10. 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.
  11. 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.
  12. 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.
  13. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
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