Information, Market Power and Price Volatility

37 Pages Posted: 16 Sep 2019

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

MIT

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2019

Abstract

We consider demand function competition with a finite number of agents and private information. 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 all information structures.

Keywords: Demand Function Competition, Supply Function Competition, Price Impact, Market Power, Incomplete Information, Price Volatility

JEL Classification: C72, D43, D44, D83, G12

Suggested Citation

Bergemann, Dirk and Heumann, Tibor and Morris, Stephen Edward, Information, Market Power and Price Volatility (September 15, 2019). Cowles Foundation Discussion Paper No. 2200, September 2019, Available at SSRN: https://ssrn.com/abstract=3454310 or http://dx.doi.org/10.2139/ssrn.3454310

Dirk Bergemann (Contact Author)

Yale University - Cowles Foundation - Department of Economics ( email )

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HOME PAGE: http://www.econ.yale.edu/~dirk/

Yale University - Cowles Foundation

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Tibor Heumann

HEC Montreal ( email )

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Stephen Edward Morris

MIT ( email )

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HOME PAGE: http://https://economics.mit.edu/faculty/semorris

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