Mergers and the Perception of Market Power: An Experimental Study

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Abstract
We study the merger paradox, a relative of Harsanyi's bargaining paradox, in an experiment. We examine bilateral mergers in experimental Cournot markets with initially three or four firms. Standard Cournot-Nash equilibrium predicts total outputs well. However, merged firms produce significantly more output than their competitors. As a result, mergers are not unprofitable. By analyzing control treatments, we provide an explanation for these results based on the notion of aspiration levels, and that the same logic also operates when a new firm enters a market. These results have some general consequences for adaptive play in changing environments.

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