Firms in Markets Under Uncertainty
Robert S. Gibbons
Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)
Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)
Michael L. Powell
Massachusetts Institute of Technology (MIT)
July 23, 2009
MIT Sloan Research Paper No. 4744-09
We analyze a rational-expectations model of price formation in an intermediate-good market under uncertainty. There is a continuum of dyads, each consisting of an upstream party and a downstream party. Both parties can make specific investments at private cost. As in property-rights models, different governance structures induce different investments. As in rational-expectations models, some parties may invest in acquiring (common-value) information, which is then incorporated into the market-clearing price by the parties' trading behaviors. The informativeness of the price mechanism affects the returns to specific investments and hence the optimal governance structure for individual dyads; meanwhile, the governance-structure choices by individual dyads affect the informativeness of the price mechanism. In equilibrium, firms and the market coexist and shape each other. In particular, the informativeness of the price mechanism can induce ex ante homogeneous dyads to choose heterogeneous governance structures.
Number of Pages in PDF File: 34
JEL Classification: D20, D23working papers series
Date posted: August 10, 2009 ; Last revised: September 8, 2009
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