Working Paper: CEPR ID: DP10791
Authors: Dirk Bergemann; Tibor Heumann; Stephen Morris
Abstract: We analyze demand function competition with a finite number of agents and private information. We show that the nature of the private information determines the market power of the agents and thus price and volume of equilibrium trade. We provide a characterization of the set of all joint distributions over demands and payoff states that can arise in equilibrium under any information structure. In demand function competition, the agents condition their demand on the endogenous information contained in the price. We compare the set of feasible outcomes under demand function to the feasible outcomes under Cournot competition. We find that the first and second moments of the equilibrium distribution respond very differently to the private information of the agents under these two market structures. The first moment of the equilibrium demand, the average demand, is more sensitive to the nature of the private information in demand function competition, reflecting the strategic impact of private information. By contrast, the second moments are less sensitive to the private information, reflecting the common conditioning on the price among the agents.
Keywords: Bayes; Correlated Equilibrium; Demand Function Competition; Incomplete Information; Linear Best Responses; Market Power; Moment Restrictions; Price Impact; Quadratic Payoffs; Supply Function Competition; Volatility
JEL Codes: C72; C73; D43; D83; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| private information (D82) | market power (L11) |
| market power (L11) | equilibrium price (D41) |
| market power (L11) | volume of trade (F10) |
| number of firms (L20) | market power (L11) |
| market power (L11) | competitive equilibrium (D41) |
| private information (D82) | equilibrium demand (D59) |
| equilibrium demand (D59) | price impact (G14) |
| private information (D82) | sensitivity of equilibrium demand (first moment) (C69) |
| demand function competition (D41) | sensitivity of equilibrium demand (first moment) (C69) |
| Cournot competition (C72) | sensitivity of equilibrium demand (second moment) (D11) |