Working Paper: CEPR ID: DP15104
Authors: Dirk Bergemann; Stephen Morris; Tibor Heumann
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: Demand Function Competition; Supply Function Competition; Price Impact; Market Power; Incomplete Information; Price Volatility; Cournot Competition
JEL Codes: C72; D43; D44; D83; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| information structure (L15) | market power (L11) |
| information structure (L15) | price volatility (G13) |
| market power (L11) | price volatility (G13) |
| information structure (L15) | demand functions (D10) |
| demand functions (D10) | market power (L11) |