On competitive nonlinear pricing

Andrea Attar, Thomas Mariotti and François Salanié
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Thomas Mariotti: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique

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Abstract: We study a discriminatory limit-order book in which market makers compete in nonlinear tariffs to serve a privately informed insider. Our model allows for general nonparametric specifications of preferences and arbitrary discrete distributions for the insider's private information. Adverse selection severely restricts equilibrium outcomes: in any pure-strategy equilibrium with convex tariffs, pricing must be linear and at most one type can trade, leading to an extreme form of market breakdown. As a result, such equilibria exist only under exceptional circumstances that we fully characterize. These results are strikingly different from those of existing analyses that postulate a continuum of types. The two approaches can be reconciled when we consider epsilon-equilibria of games with a large number of market makers or a large number of types.

Keywords: adverse selection; competing mechanism; limit-order book (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-com, nep-des, nep-gth, nep-mic and nep-reg
Note: View the original document on HAL open archive server: https://hal.science/hal-02097209v1
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Citations: View citations in EconPapers (4)

Published in Theoretical Economics, 2019, 14 (1), pp.297-343. ⟨10.3982/TE2708⟩

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Related works:
Journal Article: On competitive nonlinear pricing (2019)
Working Paper: On Competitive Nonlinear Pricing (2018)
Working Paper: On Competitive Nonlinear Pricing (2018)
Working Paper: On Competitive Nonlinear Pricing (2015)
Working Paper: On Competitive Nonlinear Pricing (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02097209

DOI: 10.3982/TE2708

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