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The Insiders’ Dilemma: An Experiment on Merger Formation

Published online by Cambridge University Press:  14 March 2025

Tobias Lindqvist and
Johan Stennek
Tobias Lindqvist*
Affiliation:
The Research Institute of Industrial Economics, Stockholm, SE10214, Sweden
Johan Stennek*
Affiliation:
The Research Institute of Industrial Economics, Stockholm, SE10214, Sweden
*
email: tobiasl@iui.se
email: johans@iui.se
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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, 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.

Keywords

coalition formationexperimentinsiders’ dilemmamergersantitrust

JEL classification

C78: Bargaining Theory • Matching TheoryL41: Monopolization • Horizontal Anticompetitive PracticesG34: Mergers • Acquisitions • Restructuring • Corporate GovernanceC92: Laboratory, Group BehaviorL13: Oligopoly and Other Imperfect Markets

Information

Type
Research Article
Information
Experimental Economics , Volume 8 , Issue 3 , September 2005, pp. 267 - 284
Copyright
Copyright © 2005 Economic Science Association

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