Mergers Under Asymmetric Information - is There a Lemons Problem?

U of Zurich, Socioeconomic Institute Working Paper No. 0213

34 Pages Posted: 30 Jan 2003

See all articles by Thomas Borek

Thomas Borek

Eidgenossische Technische Hochschule Zurich (ETHZ) - Department of Mathematics

Stefan Buehler

University of St. Gallen - SEPS: Economics and Political Sciences

Armin Schmutzler

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 17, 2004

Abstract

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

Borek, Thomas and Buehler, Stefan and Schmutzler, Armin, Mergers Under Asymmetric Information - is There a Lemons Problem? (February 17, 2004). U of Zurich, Socioeconomic Institute Working Paper No. 0213, Available at SSRN: https://ssrn.com/abstract=360260 or http://dx.doi.org/10.2139/ssrn.360260

Thomas Borek

Eidgenossische Technische Hochschule Zurich (ETHZ) - Department of Mathematics ( email )

ETH Zentrum HG-F 42.1
Raemistr. 101
CH-8092 Zurich, 8092
Switzerland
+41-1-6323406 (Phone)

Stefan Buehler

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

FGN-HSG
Varnbuelstr. 19
CH-9000 St. Gallen
Switzerland
+41-71-224-2303 (Phone)

Armin Schmutzler (Contact Author)

University of Zurich - Department of Economics ( email )

Z├╝rich, CH-8006
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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