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); 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 - Center and Faculty of Economics and Business Administration
Heinrich Heine University Dusseldorf - Department of Economics; Max Planck Institute for Research on Collective Goods
Economic Journal, Vol. 117, No. 522, pp. 1073-1095, July 2007
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 analysing control treatments, we provide an explanation for these results based on the notion of aspiration levels, and show 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: 23
Date posted: July 8, 2007
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