Market Power and Price Informativeness

Abstract

We study the distributional effects of asset ownership on price informativeness in a general equilibrium model. The model features investors (oligopolists) with different degrees of price impact and abilities to learn about individual asset payoffs from private and price signals, and a 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 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