Firms in Markets Under Uncertainty

34 Pages Posted: 10 Aug 2009 Last revised: 8 Sep 2009

See all articles by Robert S. Gibbons

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)

Date Written: July 23, 2009

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.

JEL Classification: D20, D23

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: https://ssrn.com/abstract=1446777 or http://dx.doi.org/10.2139/ssrn.1446777

Robert S. Gibbons (Contact Author)

Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )

E52-432
MIT
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617-253-0283 (Phone)
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National Bureau of Economic Research (NBER)

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Richard Holden

Massachusetts Institute of Technology (MIT) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Michael L. Powell

Massachusetts Institute of Technology (MIT) ( email )

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50 Memorial Drive
Cambridge, MA 02139-4307
United States

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