Mergers Under Asymmetric Information - is There a Lemons Problem?
U of Zurich, Socioeconomic Institute Working Paper No. 0213
34 Pages Posted: 30 Jan 2003
Date Written: February 17, 2004
We analyze a Bayesian merger game under two-sided asymmetric information about firm types. We show that the standard prediction of the lemons market model-if any, only low-type firms are traded-is likely to be misleading: Merger returns, i.e. the difference between pre- and post-merger profits, are not necessarily higher for low-type firms. This has two implications. First, under very general conditions, equilibria exist where mergers take place, and there is no presumption that there is ineffciently low trade. Second, in these equilibria it is typically not the case that only low-type firms enter an agreement.
Keywords: merger, asymmetric information, oligopoly, single crossing
JEL Classification: D43, D82, L13, L33
Suggested Citation: Suggested Citation