Strategic Manipulation and Information Market Microstructure

12 Pages Posted: 11 Mar 2004

Abstract

This paper presents a model of strategic manipulation in the context of an informational duopoly. The fact that market manipulation by these duopolists may affect their cost and demand structures implies that they can strategically manipulate the market in order to influence the information market equilibrium. This paper derives an equilibrium manipulation and establishes important comparative-static properties that may characterise such markets. The informational duopoly is beset with two types of inefficiency: first, market imperfections drive a wedge between the marginal cost and the market price leading to the usual deadweight loss. Secondly, an act of manipulation raises the marginal cost of production and, thereby, causes further welfare loss in such markets. We provide a complete characterisation of an optimal mechanism that can stem the welfare loss in informational markets.

Suggested Citation

Gangopadhyay, Partha, Strategic Manipulation and Information Market Microstructure. Australian Economic Papers, Vol. 43, pp. 75-86, March 2004. Available at SSRN: https://ssrn.com/abstract=513269

Partha Gangopadhyay (Contact Author)

University of Western Sydney ( email )

PO Box 10
Kingswood, NSW 2747
Australia

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