Sweetening the Pill: A Theory of Waiting To Merge

Abstract

Merger policy is a permission-granting activity by government in which there may be disincentives to seek permission because of the benefit from having other firms merge. We set up a sequential merger game with endogenized antitrust policy to study one aspect of these disincentives. In particular, we delineate a pill-sweetening motive for waiting to merge: a small firm may choose to let other bigger firms move first, in order to get more mergers approved by government. We report the prevalence of pill sweetening to occur in equilibrium and find it to hinge on efficiency gains from a merger, differently-sized firms, firms' production technology, the presence of an antitrust authority, the alignment of interests between antitrust authorities and firms, and the number of firms in the industry.

Keywords: Mergers, Antitrust Policy

JEL Classification: L11, L13, L41, G34