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Horizontal Mergers with Synergies: Cash vs. Profit-Share Auctions

Posted: 29 Jul 2013  

Wei Ding

University of Bonn - The Bonn Graduate School of Economics

Cuihong Fan

Shanghai University of Finance and Economics

Elmar Wolfstetter

Humboldt University of Berlin - Faculty of Economics; Korea University - College of Economics and Commerce; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 29, 2013

Abstract

We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target and bidders can influence rivals' beliefs through their bids. We compare cash and profit-share auctions, first- and second-price, supplemented by entry fees. Since non-merged firms benefit from a merger if synergies are low, bidders are subject to a positive externality with positive probability; nevertheless, pooling does not occur. Unlike cash auctions, profit-share auctions are not revenue equivalent, and the second-price profit-share auction is more profitable than the other auctions.

Keywords: Horizontal mergers, Takeovers, Auctions, Externalities, Oligopoly

JEL Classification: G34, D44, H23, L13, D43

Suggested Citation

Ding, Wei and Fan, Cuihong and Wolfstetter, Elmar, Horizontal Mergers with Synergies: Cash vs. Profit-Share Auctions (July 29, 2013). International Journal of Industrial Organization, Vol. 31, No. 5, 2013. Available at SSRN: https://ssrn.com/abstract=2302488

Wei Ding

University of Bonn - The Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

Cuihong Fan

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Elmar G. Wolfstetter (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Humboldt University of Berlin - Faculty of Economics ( email )

Institut für Wirtschaftstheorie I
Spandauer Strasse 1
Berlin
Germany
+49 30 2093 5652/3 (Phone)
+49 30 2093 5619 (Fax)

HOME PAGE: http://https://www.wiwi.hu-berlin.de/de/professuren/vwl/microeconomics/people/ewolfstetter

Korea University - College of Economics and Commerce ( email )

Anam-dong, Sungbuk-Ku
Seoul, 136-701
Korea

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