Competition in schedules with cursed traders

Anna Bayona and Carolina Manzano

Journal of Economic Theory, 2024, vol. 222, issue C

Abstract: We study a market with sellers that compete in supply functions, face an elastic demand, and have imperfect cost information. In our model, sellers neglect some informational content of the price. In order to capture this feature, we use the cursed expectations equilibrium concept. In the linear-quadratic-normal framework, this paper presents conditions under which the unique equilibrium in linear supply functions exists and derives some comparative statics results. Compared to markets with fully rational sellers, we find that market power and the expected price-cost margin are lower; the price reaction to private information can be higher due to imperfect competition and demand elasticity; expected profits can be greater; and expected total surplus can also increase if the efficiency gains from reduced market power outweigh the losses from cursedness.

Keywords: Cursed equilibrium; Market power; Market quality; Total surplus (search for similar items in EconPapers)
JEL-codes: C72 D44 D82 G14 G40 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:222:y:2024:i:c:s0022053124001418

DOI: 10.1016/j.jet.2024.105935

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