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Information, Market Power and Price Volatility

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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. In particular, regardless of the number of agents and the correlation of payoff shocks, market power may be arbitrarily close to zero (so we obtain the competitive outcome) or arbitrarily large (so there is no trade in equilibrium). By contrast, price volatility is always less than the variance of the aggregate shock across all information structures.

Suggested Citation

  • Dirk Bergemann & Tibor Heumann & Stephen Morris, 2019. "Information, Market Power and Price Volatility," Cowles Foundation Discussion Papers 2200, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2200
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    References listed on IDEAS

    as
    1. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    2. Dirk Bergemann & Stephen Morris, 2013. "Robust Predictions in Games With Incomplete Information," Econometrica, Econometric Society, vol. 81(4), pages 1251-1308, July.
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    7. Grossman, Sanford J, 1981. "Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs," Econometrica, Econometric Society, vol. 49(5), pages 1149-1172, September.
    8. Bergemann, Dirk & Heumann, Tibor & Morris, Stephen, 2015. "Information and volatility," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 427-465.
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    13. repec:cwl:cwldpp:1821rrr is not listed on IDEAS
    14. A. P. Lerner, 1934. "The Concept of Monopoly and the Measurement of Monopoly Power," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 1(3), pages 157-175.
    15. Heumann, Tibor, 2021. "Efficiency in trading markets with multi-dimensional signals," Journal of Economic Theory, Elsevier, vol. 191(C).
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Jason Allen & Milena Wittwer, 2023. "Intermediary Market Power and Capital Constraints," Staff Working Papers 23-51, Bank of Canada.
    2. Lou, Youcheng & Rahi, Rohit, 2021. "Information, market power and welfare," LSE Research Online Documents on Economics 118843, London School of Economics and Political Science, LSE Library.
    3. Rahi, Rohit, 2021. "Information acquisition with heterogeneous valuations," Journal of Economic Theory, Elsevier, vol. 191(C).
    4. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," Journal of Economic Theory, Elsevier, vol. 214(C).
    5. Michail Anthropelos & Scott Robertson, 2024. "Strategic Informed Trading and the Value of Private Information," Papers 2404.08757, arXiv.org.
    6. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," LSE Research Online Documents on Economics 120479, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Demand Function Competition; Supply Function Competition; Price Impact; Market Power; Incomplete Information; Price Volatility;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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