DP3839 | Weddings with Uncertain Prospects - Mergers under Asymmetric Information

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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.