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. Regardless of the number of agents and the correlation of payo¤ shocks, market power may be arbitrarily close to zero (the competitive outcome) or arbitrarily large (so there is no trade). By contrast, price volatility is always lower than the variance of the aggregate shock across all information structures. Alternative trading mechanisms lead to very distinct bounds as a comparison with Cournot competition establishes..

Keywords: Cournot Competition, Demand function competition, incomplete information, market power, price impact, Price volatility, Supply function competition

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