Information and Market Power
66 Pages Posted: 5 Aug 2015
Date Written: August 4, 2015
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: Suggested Citation