Insider's Dilemma: A General Solution in a Repeated Game
19 Pages Posted: 15 Jul 2015
Date Written: July 14, 2015
We show that in an infinitely repeated Cournot game when firms adopt stick and carrot strategies exogenous horizontal mergers are profitable regardless the size of the merged entity. We characterize an equilibrium in which the new entity maximizes its discounted intertemporal profit under the constraint that each outsider produces just enough to be better off after the merger. Once the merger has occurred each insider gains more than each outsider, therefore the insider's dilemma is completely solved.
Keywords: Insider's dilemma, horizontal mergers, repeated games, stick and carrot strategy
JEL Classification: L110, L120
Suggested Citation: Suggested Citation