Horizontal Mergers Under Asymmetric Information About Synergies

This paper analyses a situation in which there are three quantity-setting firms, two of which are considering whether or not to merge. When these two firms have private information about the potential cost-saving synergies of the merger, they may have an incentive to overstate them. This is because if they succeed in making the non-merging rival firm believe that the synergies are high, the rival firm reduces output and the merger becomes more profitable. Under some conditions, anticipating that the rival will form such a belief, low-synergy firms that would never merge under complete information will mimic high-synergy firms by merging. Such pooling behaviour by the merging firms can have a negative impact on social welfare.