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Insider's Dilemma: A General Solution in a Repeated Game

19 Pages Posted: 15 Jul 2015  

Cesi Berardino

University of Rome, Tor Vergata - Tor Vergata Economics University Foundation

Walter Ferrarese

University of Rome, Tor Vergata - Department of Economics, Law and Institutions

Date Written: July 14, 2015

Abstract

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

Berardino, Cesi and Ferrarese, Walter, Insider's Dilemma: A General Solution in a Repeated Game (July 14, 2015). CEIS Working Paper No. 350. Available at SSRN: https://ssrn.com/abstract=2630634 or http://dx.doi.org/10.2139/ssrn.2630634

Cesi Berardino (Contact Author)

University of Rome, Tor Vergata - Tor Vergata Economics University Foundation ( email )

Via Columbia 2
Rome, 00133
Italy

Walter Ferrarese

University of Rome, Tor Vergata - Department of Economics, Law and Institutions ( email )

Via Columbia, 2
Rome, Rome 00133
Italy

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