Information, Market Power and Price Volatility
Tibor Heumann; Dirk Bergemann; Stephen Morris
The RAND Journal of Economics, forthcoming
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 payo§ 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.
Jel Classification: C72, D43, D44, D83, G12.
Keywords: Demand Function Competition, Supply Function Competition, Price Impact, Market Power, Incomplete Information, Price Volatility
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