CFDP 2017R

Information and Market Power

Author(s): 

Publication Date: August 2015

Revision Date: November 2018

Pages: 49

Abstract: 

We consider demand function competition with a finite number of agents and private information. We analyze how the structure of the private information shapes the market power of each agent and the price volatility. 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 agents across all information structures, hence we can provide sharp and robust bounds on some but not all equilibrium statistics.

We then compare demand function competition with a different uniform price trading mechanism, namely Cournot competition. Interestingly, in Cournot competition, the market power is uniquely determined while the price volatility cannot be bounded by the variance of the aggregate shock.

Keywords: 

Demand function competition, Supply function competition, Price impact, Market power, Incomplete information, Bayes correlated equilibrium, Volatility, Moments restrictions, Linear best responses

JEL Classification Codes:  C72, C73, D43, D83, G12