Weddings with Uncertain Prospects - Mergers Under Asymmetric Information

38 Pages Posted: 20 May 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: March 2003

Abstract

We provide a framework for analysing bilateral mergers when there is two-sided asymmetric information about firms' types. We introduce the concepts of essentially monotone decreasing (EMD) and increasing (EMI) functions, which generalize the respective mono-tonicity properties. If the profit differential between post-merger and pre-merger profits satisfies EMD, low-state firms gain more than high-state firms from mergers in expectation. Using this result, we characterize the equilibria of merger games with simultaneous and sequential moves. The application of our framework to specific oligopoly models illustrates that the introduction of two-sided asymmetric information may lead to considerable changes in the predicted merger pattern.

Keywords: Merger, asymmetric information, oligopoly, single crossing, essentially monotone decreasing functions

JEL Classification: D43, D82, L13, L33

Suggested Citation

Borek, Thomas and Buehler, Stefan and Schmutzler, Armin, Weddings with Uncertain Prospects - Mergers Under Asymmetric Information (March 2003). CEPR Discussion Paper No. 3839. Available at SSRN: https://ssrn.com/abstract=410030

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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