On Competitive Nonlinear Pricing

45 Pages Posted: 30 Apr 2014

See all articles by Andrea Attar

Andrea Attar

Toulouse School of Economics; University of Roma Tor Vergata

Thomas Mariotti

University of Toulouse I

Francois Salanie

National Institute for Agricultural Research (INRA); University of Toulouse 1 - Toulouse School of Economics (TSE)

Multiple version iconThere are 2 versions of this paper

Date Written: April 28, 2014

Abstract

Many financial markets rely on a discriminatory limit-order book to balance supply and demand. We study these markets in a static model in which uninformed market makers compete in nonlinear tariffs to trade with an informed insider, as in Glosten (1994), Biais, Martimort, and Rochet (2000), and Back and Baruch (2013). We analyze the case where tariffs are unconstrained and the case where tariffs are restricted to be convex. In both cases, we show that pure-strategy equilibrium tariffs must be linear and, moreover, that such equilibria only exist under exceptional circumstances. These results stand in stark contrast with those obtained so far in the literature, reflecting different assumptions about the richness of the insider's information.

Keywords: Adverse Selection, Competing Mechanisms, Limit-Order Book.

JEL Classification: D43, D82, D86.

Suggested Citation

Attar, Andrea and Mariotti, Thomas and Salanie, Francois, On Competitive Nonlinear Pricing (April 28, 2014). CEIS Working Paper No. 314, Available at SSRN: https://ssrn.com/abstract=2430255 or http://dx.doi.org/10.2139/ssrn.2430255

Andrea Attar (Contact Author)

Toulouse School of Economics

21, allée de Brienne
Toulouse, F 31000
France
+33 5 61128578 (Phone)

University of Roma Tor Vergata ( email )

2 Via Columbia
00100 Rome
Italy

Thomas Mariotti

University of Toulouse I ( email )

Toulouse, 31000
France

Francois Salanie

National Institute for Agricultural Research (INRA) ( email )

21, Allee de Brienne
31000 Toulouse
France

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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