Working Paper: CEPR ID: DP3839
Authors: Thomas Borek; Stefan Buehler; Armin Schmutzler
Abstract: We provide a framework for analysing bilateral mergers when there is two-sided asymmetric information about firms? types. We introduce the concepts of essentially monotone decreasing (EMD) and increasing (EMI) functions, which generalize the respective mono-tonicity properties. If the profit differential between post-merger and pre-merger profits satisfies EMD, low-state firms gain more than high-state firms from mergers in expectation. Using this result, we characterize the equilibria of merger games with simultaneous and sequential moves. The application of our framework to specific oligopoly models illustrates that the introduction of two-sided asymmetric information may lead to considerable changes in the predicted merger pattern.
Keywords: asymmetric information; essentially monotone decreasing functions; merger; oligopoly; single crossing
JEL Codes: D43; D82; L13; L33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low-state firms (L29) | gain more from mergers (G34) |
| profit differential function EMD (C69) | low-state firms consent to mergers (G34) |
| profit differential function EMD (C69) | high-state firms do not consent to mergers (L49) |
| cutoff structure (C24) | low types consent to merger (G34) |
| cutoff structure (C24) | high types do not consent to merger (L49) |
| types just below cutoff (C24) | break even in expectation (D84) |
| types just below cutoff (C24) | incur losses if partner is low type (D80) |