The Merger Paradox and Why Aspiration Levels Let it Fail in the Laboratory
43 Pages Posted: 23 Jun 2001
Date Written: 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.
Keywords: Aspiration levels, Cournot, experiments, merger, merger psychology, oligopoly, entry
JEL Classification: C72, C91, D43, L13, L40
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