Ding, Wei; Fan, Cuihong; Wolfstetter, Elmar G.
Horizontal mergers with synergies: first-price vs. profit-share auction.
SFB/TR 15 Discussion Paper No. 336
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.