Information and Market Power

66 Pages Posted: 5 Aug 2015

See all articles by Dirk Bergemann

Dirk Bergemann

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

Tibor Heumann

HEC Montreal

Stephen Morris

Princeton University - Department of Economics

Multiple version iconThere are 5 versions of this paper

Date Written: August 4, 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

Bergemann, Dirk and Heumann, Tibor and Morris, Stephen Edward, Information and Market Power (August 4, 2015). Cowles Foundation Discussion Paper No. 2017. Available at SSRN: https://ssrn.com/abstract=2639692 or http://dx.doi.org/10.2139/ssrn.2639692

Dirk Bergemann (Contact Author)

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

Stephen Edward Morris

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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