Abstract

http://ssrn.com/abstract=1446777
 
 

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Firms in Markets Under Uncertainty


Robert S. Gibbons


Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)

Richard Holden


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

Abstract:     
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, D23

working papers series


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Date posted: August 10, 2009 ; Last revised: September 8, 2009

Suggested Citation

Gibbons, Robert S. and Holden, Richard and Powell, Michael L., Firms in Markets Under Uncertainty (July 23, 2009). MIT Sloan Research Paper No. 4744-09. Available at SSRN: http://ssrn.com/abstract=1446777 or http://dx.doi.org/10.2139/ssrn.1446777

Contact Information

Robert S. Gibbons (Contact Author)
Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )
E52-432
MIT
Cambridge, MA 02142
United States
617-253-0283 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Richard Holden
Massachusetts Institute of Technology (MIT) ( email )
E52-410
50 Memorial Drive
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Michael L. Powell
Massachusetts Institute of Technology (MIT) ( email )
77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States
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