Information and Market Power

50 Pages Posted: 6 Nov 2018

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: October 30, 2018

Abstract

We consider demand function competition with a finite number of agents and private information. We analyze how the structure of the private information shapes the market power of each agent and the price volatility. We show that any degree of market power can arise in the unique equilibrium under an information structure that is arbitrarily close to complete information. In particular, regardless of the number of agents and the correlation of payoff shocks, market power may be arbitrarily close to zero (so we obtain the competitive outcome) or arbitrarily large (so there is no trade in equilibrium). By contrast, price volatility is always less than the variance of the aggregate shock across agents across all information structures, hence we can provide sharp and robust bounds on some but not all equilibrium statistics.

We then compare demand function competition with a different uniform price trading mechanism, namely Cournot competition. Interestingly, in Cournot competition, the market power is uniquely determined while the price volatility cannot be bounded by the variance of the aggregate shock.

Keywords: Demand function competition, Supply function competition, Price impact, Market power, Incomplete information, Bayes correlated equilibrium, Volatility, Moments restrictions, Linear best responses

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

Suggested Citation

Bergemann, Dirk and Heumann, Tibor and Morris, Stephen Edward, Information and Market Power (October 30, 2018). Cowles Foundation Discussion Paper No. 2017R. Available at SSRN: https://ssrn.com/abstract=3276348 or http://dx.doi.org/10.2139/ssrn.3276348

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

Register to save articles to
your library

Register

Paper statistics

Downloads
56
rank
41,593
Abstract Views
302
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information