Wednesday, August 28, 2013

Horizontal Mergers with Synergies: Cash vs. Profit-Share Auctions

Posted by D. Daniel Sokol

Wei Ding, University of Bonn - The Bonn Graduate School of Economics, Cuihong Fan, Shanghai University of Finance and Economics, and Elmar Wolfstetter, Humboldt University of Berlin - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Korea University - College of Economics and Commerce; World Bank discuss Horizontal Mergers with Synergies: Cash vs. Profit-Share Auctions.

ABSTRACT: We consider takeover bidding in a Cournot oligopoly when firms have private information concerning the synergy effect of merging with a takeover target and bidders can influence rivals' beliefs through their bids. We compare cash and profit-share auctions, first- and second-price, supplemented by entry fees. Since non-merged firms benefit from a merger if synergies are low, bidders are subject to a positive externality with positive probability; nevertheless, pooling does not occur. Unlike cash auctions, profit-share auctions are not revenue equivalent, and the second-price profit-share auction is more profitable than the other auctions.

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