Market Power and Price Informativeness

Abstract

We study the distributional effects of asset ownership on price informativeness in a general equilibrium model featuring large investors (oligopolists) who have price impact and learn about individual asset payoffs from private signals as well as price signals, and competitive fringe that only learns from asset prices. We show that price informativeness is non-monotonic in the oligopolists’ aggregate size, decreasing in the sector’s concentration and in the size of the passive oligopolistic sector. We further show that the size effect can be decomposed into a learning channel capturing investors’ quality of private signals and an information pass-through channel measuring the sensitivity of investors’ trades to private signals, with the latter one being the primary source of variation in price informativeness relative to the size distribution.

Keywords: Market Power, Information, Institutions, Passive Investing

JEL Classification: G11, G14, G23