Monday, November 15, 2010
Posted by D. Daniel Sokol
Wei Ding (University of Bonn), Cuihong Fan (Shanghai University of Finance and Economics), Elmar G. Wolfstetter (Humboldt University of Berlin) address Horizontal mergers with synergies: first-price vs. profit-share auction.
ABSTRACT: We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target. Two auction rules are considered: standard first-price and profit-share auctions, supplemented by entry fees. Since non-merged firms benefit from a merger if the synergies are low, bidders are subject to a positive externality. Nevertheless, pooling does not occur; and the profit-share auction is strictly more profitable than the first-price auction, regardless of whether firms observe the synergy parameter or only the winning bid before they play the oligopoly game.