Information, Market Power and Price Volatility

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