Competition in Schedules with Traders that Neglect the Informational Content of the Price

Abstract

We study a market with competition in schedules, such as in asset auctions or wholesale electricity markets, with boundedly rational sellers that partially neglect the informational content of the price. Using the cursed equilibrium concept, we find that the unique symmetric linear equilibrium with cursed sellers is more competitive, might lead to a lower trading volume, and a higher volatility of prices compared to when sellers are fully rational. Under some conditions, total surplus and profits are higher with cursed sellers than with fully rational ones. Our results critically depend on imperfect competition and on the demand elasticity.

Keywords: cursed equilibrium, bounded rationality, market power, trading volume, welfare.

JEL Classification: C72, D44, D82, G14, G40