Strategic Supply Function Competition with Private Information

Xavier Vives

No 6960, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A finite number of sellers (n) compete in schedules to supply an elastic demand. The costs of the sellers have uncertain common and private value components and there is no exogenous noise in the system. A Bayesian supply function equilibrium is characterized; the equilibrium is privately revealing and the incentives to acquire information are preserved. Price-cost margins and bid shading are affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Private information coupled with strategic behavior induces additional distortionary market power above full information levels and welfare losses which can be counteracted by subsidies. As the market grows large the equilibrium becomes price-taking, bid shading is of the order of 1/n, and the order of magnitude of welfare losses is 1/n2. The results extend to demand schedule competition and a range of applications in product and financial markets are presented.

Keywords: Adverse selection; Collusion; Competitiveness; Rational expectations; Welfare; Reverse auction; Demand schedule competition; market power (search for similar items in EconPapers)
JEL-codes: D44 D82 E58 F13 G14 L13 L94 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-bec, nep-com, nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP6960 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Strategic Supply Function Competition With Private Information (2011)
Working Paper: Strategic Supply Function Competition with Private Information (2009)
Working Paper: Strategic Supply Function Competition with Private Information (2009)
Working Paper: Strategic Supply Function Competition with Private Information (2008)
Working Paper: Strategic supply function competition with private information (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6960

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6960

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().