The Merger Paradox and Why Aspiration Levels Let It Fail in the Laboratory
University College London - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
Kai A. Konrad
Max Planck Institute for Tax Law and Public Finance; Social Science Research Center Berlin (WZB); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
Tilburg University - Department of Economics; University of Vienna - Faculty of Business, Economics, and Statistics
Heinrich-Heine Universitaet Duesseldorf - Department of Economics; Max Planck Institute for Research on Collective Goods
October 22, 2006
We study the merger paradox, a relative of Harsanyi's bargaining paradox, in an experiment. We examine bilateral mergers in experimental Cournot markets with initially three or four firms. Standard Cournot-Nash equilibrium predicts total outputs well. However, merged firms produce significantly more output than their competitors. As a result, mergers are not unprofitable. By analyzing control treatments, we provide an explanation for these results based on the notion of aspiration levels, and that the same logic also operates when a new firm enters a market. These results have some general consequences for adaptive play in changing environments.
Number of Pages in PDF File: 43
Keywords: Aspiration levels, Cournot, experiments, merger, merger psychology, oligopoly, entry
JEL Classification: C72, C91, D43, L13, L40working papers series
Date posted: June 23, 2001
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