Information Aggregation and Innovation in Market Design

Abstract:     
The literature on information aggregation predicts that market growth unambiguously reduces uncertainty about the value of traded goods. The results were developed within the classical model, which assumes that traders’ values for the exchanged good are determined by fundamental (common) shocks. At the same time, design innovation in contemporaneous markets seems to exploit demand interdependence among agents with similar tastes or common information sharing (e.g., Facebook ads, the practice of customer targeting). This paper demonstrates that with heterogeneous interdependence among agents’ values or noise in signals about values, opportunities to innovate in smaller or less connected (in the network-theoretic sense) markets may dominate those in larger or better connected markets.

Number of Pages in PDF File: 21

Keywords: Interdependent values and noise, Network, Link Formation, Innovation, Information Aggregation, Divisible Good Auction, Commonality

JEL Classification: D44, D82, L13, G14

working papers series