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Weddings with Uncertain Prospects Mergers under Asymmetric Information


Borek, Thomas; Buehler, Stefan; Schmutzler, Armin (2004). Weddings with Uncertain Prospects Mergers under Asymmetric Information. Working paper series / Socioeconomic Institute No. 213, 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.

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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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:D43, D82, L13, L33
Language:English
Date:February 2004
Deposited On:29 Nov 2011 22:32
Last Modified:05 Apr 2016 15:11
Series Name:Working paper series / Socioeconomic Institute
Official URL:http://www.econ.uzh.ch/wp.html
Permanent URL: http://doi.org/10.5167/uzh-52171

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