Information and Market Power

65 Pages Posted: 4 Aug 2015

See all articles by Stephen Morris

Stephen Morris

Princeton University - Department of Economics

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics; Yale University - Cowles Foundation

Tibor Heumann

HEC Montreal

Multiple version iconThere are 5 versions of this paper

Date Written: August 3, 2015

Abstract

We analyze demand function competition with a finite number of agents and private information. We show that the nature of the private information determines the market power of the agents and thus price and volume of equilibrium trade.

We establish our results by providing a characterization of the set of all joint distributions over demands and payoff states that can arise in equilibrium under any information structure. In demand function competition, the agents condition their demand on the endogenous information contained in the price.

We compare the set of feasible outcomes under demand function to the feasible outcomes under Cournot competition. We find that the first and second moments of the equilibrium distribution respond very differently to the private information of the agents under these two market structures. The first moment of the equilibrium demand, the average demand, is more sensitive to the nature of the private information in demand function competition, reflecting the strategic impact of private information. By contrast, the second moments are less sensitive to the private information, reflecting the common conditioning on the price among the agents.

Keywords: Demand Function Competition, Supply Function Competition, Price Impact, Market Power, Incomplete Information, Bayes Correlated Equilibrium, Volatility, Moments Restrictions, Linear Best Responses, Quadratic Payoffs

JEL Classification: C72, C73, D43, D83, G12.

Suggested Citation

Morris, Stephen Edward and Bergemann, Dirk and Heumann, Tibor, Information and Market Power (August 3, 2015). Princeton University William S. Dietrich II Economic Theory Center Research Paper No. 070_2015. Available at SSRN: https://ssrn.com/abstract=2639274 or http://dx.doi.org/10.2139/ssrn.2639274

Stephen Edward Morris (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Dirk Bergemann

Yale University - Cowles Foundation - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-3592 (Phone)
203-432-2128 (Fax)

HOME PAGE: http://www.econ.yale.edu/~dirk/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Tibor Heumann

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

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