Takeover Threats, Pricing Strategies and the Dynamics of Information Flows

This paper analyzes the impact of a takeover threat on information flows (or communication) within or across firms. We consider a long-term relationship between a firm and a privately informed trading partner, say a buyer. Both parties bargain over a price in each period and a takeover may take place. When takeovers are ruled out, having high bargaining power increases the firm’s likelihood to exploit information previously revealed by the buyer in subsequent contract offers. This decreases the price which the firm can offer to induce the buyer to reveal his type. The possibility of a takeover by a raider with a bargaining power higher than the incumbent manager’s increases the cost of information revelation to the buyer. This in turn leads the incumbent manager either to further decrease the price she charges to induce information revelation or to charge a semi-separating price, in which case the takeover is less likely to take place. In contrast, in the durable good monopolist case, information revelation decreases expected future profits and hence the incentive for takeover so that the possibility of takeover favors information revelation. Our results lead to a number of testable predictions on pricing decisions (and patterns in industrial relations) by potential targets.