Mergers and Acquisitions in a Business Game

Abstract

We apply a design-science approach to examine the merger and acquisition features of a business game. These features include an experience-curve model that constitutes the endogenous incentive for horizontal integration, supplemented with a production capacity limit and a business license fee for each firm. Procedures for acquisitions include the ability of firms to found subsidiary firms and to purchase firms by submitting market offers to buy shares, by accepting market offers to sell shares, and by engaging in statutory takeovers. The game was administered to 180 college undergraduates for 200 periods over the duration of one semester. By the end of the exercise, the participants had founded 285 firms across five interdependent industries. About 28% of the firms had acquired other firms. Forward acquisitions exceed backward and conglomerate acquisitions throughout the duration of the exercise, forward acquisitions exceed horizontal acquisitions when the economy is less mature, and horizontal acquisitions increase more than forward, backward, and conglomerate acquisitions when the economy is more mature. On the whole, participants behaved rationally, evidence that the merger and acquisition features function as intended. A follow-up study of hubris in mergers and acquisitions is suggested.