Insider's Dilemma: a General Solution in a Repeated Game
Cesi BerardinoFerrarese Walter
CEIS Research Paper
We show that in an infinitely repeated Cournot game when firms adopt stick and carrot strategies exogenous horizontal mergers are profitable regardless the size of the merged entity. We characterize an equilibrium in which the new entity maximizes its discounted intertemporal profit under the constraint that each outsider produces just enough to be better off after the merger. Once the merger has occurred each insider gains more than each outsider, therefore the insider's dilemma is completely solved.
Keywords: Insider's dilemma, horizontal mergers, repeated games, stick and carrot strategy
JEL codes: L110,L120
Date: Tuesday, July 14, 2015
Revision Date: Tuesday, July 14, 2015