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Modelling firm mergers as a roommate problem

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  • Angelov, Nikolay

    () (Department of Economics)

Abstract

We propose a way to model firm mergers using a matching game known as the roommate problem, whereby firms are assumed to make preference rankings of potential merger partners. The position of a firm in another firm's ranking is assumed to be governed by an index, which in turn consists of a deterministic part and of a stochastic one, similar to the latent indices used in standard discrete-choice models. Given all firms' preferences, game-theoretic mechanisms lead to a matching whereby each firm is either self-matched or assigned a merger partner. We derive expressions for the probability of a merger between a specific firm pair, and also a log-likelihood function for estimation using firm-specific data. Using a simulation in a setting with groups of three firms involved in roommate games within each group, the model's finite-sample properties are examined.

Suggested Citation

  • Angelov, Nikolay, 2006. "Modelling firm mergers as a roommate problem," Working Paper Series 2006:10, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uunewp:2006_010
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    References listed on IDEAS

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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. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
    3. Diamantoudi, Effrosyni & Miyagawa, Eiichi & Xue, Licun, 2004. "Random paths to stability in the roommate problem," Games and Economic Behavior, Elsevier, vol. 48(1), pages 18-28, July.
    4. Roth, Alvin E. & Sotomayor, Marilda, 1992. "Two-sided matching," Handbook of Game Theory with Economic Applications,in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 1, chapter 16, pages 485-541 Elsevier.
    5. John K. Dagsvik & Ane S. Flaatten & Helge Brunborg, 1998. "A Behavioral Two-Sex Marriage Model," Discussion Papers 238, Statistics Norway, Research Department.
    6. Sven-Olof Fridolfsson & Johan Stennek, 2010. "Industry Concentration and Welfare: On the Use of Stock Market Evidence from Horizontal Mergers," Economica, London School of Economics and Political Science, pages 734-750.
    7. Roth, Alvin E & Vande Vate, John H, 1990. "Random Paths to Stability in Two-Sided Matching," Econometrica, Econometric Society, vol. 58(6), pages 1475-1480, November.
    8. Morton I. Kamien & Israel Zang, 1990. "The Limits of Monopolization Through Acquisition," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 465-499.
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    Cited by:

    1. Per Engstrom & Bertil Holmlund, 2009. "Tax evasion and self-employment in a high-tax country: evidence from Sweden," Applied Economics, Taylor & Francis Journals, vol. 41(19), pages 2419-2430.
    2. Hallberg, Daniel, 2006. "Cross-national differences in income poverty among Europe´s 50+," Working Paper Series 2006:14, Uppsala University, Department of Economics.
    3. Sören Blomquist & Vidar Christiansen & Luca Micheletto, 2010. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates," American Economic Journal: Economic Policy, American Economic Association, vol. 2(2), pages 1-27, May.
    4. Ågren, Martin, 2006. "Prospect Theory and Higher Moments," Working Paper Series 2006:24, Uppsala University, Department of Economics.

    More about this item

    Keywords

    firm mergers; roommate game; matching markets; discrete response;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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