Two airlines, A and B would like to merge. They must go before the mergers commission of the government in order to have the merger approved, however….

Two airlines, A and B would like to merge. They must go before the mergerscommission of the government in order to have the merger approved, however. Thelawyers of the two companies can follow two types of legal strategy when going beforethe commission. The first strategy would recognize up-front that there are potential competitive concerns surrounding the merger and would propose to divest a portion of Company B’s routes to a competitor. If the lawyers follow this strategy (“safe”), they anticipate that the antitrust authority will not give the merger any trouble. On the other hand, Company A and Company B will be a less profitable concern with the divestment than it would be without. Analysts anticipate a yearly profit of $50M for the two companies if divestment occurs, whereas they see profits of $100M yearly if no divestment occurs and the merger goes through. The lawyers can also follow a riskier strategy (“risky”). Under this alternative, they would simply present the merger as not a competitive concern and vigorously defend this point of view under questioning by the merger commission. The problem with this approach is that, if it fails, the commissioners may become annoyed and bar the merger from occurring at all. In fact, lawyers estimate that this would occur with a 75% probability. If no merger occurs, the firms earn a profit of $0. Finally, the lawyers can follow a strategy of “talk”: delaying the formal proposal of the merger while they “feel out” the position of the commissioners on a possible merger of these two companies. Assume that there is no cost of waiting the amount of time that this process would require and that the lawyers will have a perfect idea of the reaction of the commission to the risky strategy after gathering this information. On a piece of paper, draw a diagram that represents the decision to be taken by the lawyers. What is the value of information in this decision? Assume that the companies are risk-neutral.

 
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