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Discussion Paper Details

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Title: The Insiders' Dilemma: An Experiment on Merger Formation

Author(s): Tobias Lindqvist and Johan Stennek

Publication Date: April 2005

Keyword(s): antitrust, coalition formation, experiment, insiders' dilemma and mergers

Programme Area(s): Industrial Organization

Abstract: This paper tests the insiders? dilemma hypothesis in a laboratory experiment. The insiders? dilemma means that a profitable merger does not occur, because it is even more profitable for each firm to unilaterally stand as an outsider (Stigler, 1950; Kamien and Zang, 1990 and 1993). The experimental data provides support for the insiders? dilemma, and thereby for endogenous rather than exogenous merger theory. More surprisingly, our data suggests that fairness (or relative performance) considerations also make profitable mergers difficult. Mergers that should occur in equilibrium do not, since they require an unequal split of surplus.

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Bibliographic Reference

Lindqvist, T and Stennek, J. 2005. 'The Insiders' Dilemma: An Experiment on Merger Formation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5016