Market Power, Fully Revealing Prices and Welfare

20 Pages Posted: 26 Oct 2012 Last revised: 7 Nov 2012

Manuel Mueller-Frank

University of Navarra, IESE Business School

Date Written: November 7, 2012

Abstract

This paper considers a dynamic duopoly market with strategic, price setting firms and an infinite set of fully rational, privately informed consumers who enter the market sequentially. I show that there exists a sequential equilibrium in which prices converge to their realized product qualities with probability one, hence perfectly aggregating the privately held information. This fully revealing equilibrium is shown to be welfare inferior to a fixed price equilibrium in which perfect information aggregation might fail. Therefore, one has to be careful not to equate fully revealing prices with welfare optimality.

Keywords: Dynamic markets, market power, information aggregation, social learning, prices

JEL Classification: D21, D43, D60, D82, D83, D84

Suggested Citation

Mueller-Frank, Manuel, Market Power, Fully Revealing Prices and Welfare (November 7, 2012). Available at SSRN: https://ssrn.com/abstract=2161372 or http://dx.doi.org/10.2139/ssrn.2161372

Manuel Mueller-Frank (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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