Strategic Effects between Price-takers and Non-price-takers

Hirth Hans () and Walther Martin ()
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Hirth Hans: Finance and Investment, Technische Universität Berlin, Sec. H 64, Straße des 17. Juni 135, 10623Berlin, Germany
Walther Martin: Finance and Investment, Technische Universität Berlin, Sec. H 64, Straße des 17. Juni 135, 10623Berlin, Germany

The B.E. Journal of Theoretical Economics, 2018, vol. 18, issue 2, 18

Abstract: Price-taking behavior seems to contradict rationality if a price effect is to be expected. This paper identifies a strategic effect between price-takers and non-price-takers on financial markets. It results from the liquidity reduction non-price-taking induces. Thus, a trade-off between the benefits of calculating price impacts correctly and market liquidity exists. It is shown that price-takers may benefit more from trading than their fully rational counterparts do. Moreover, it is demonstrated that when the choice of behavior is unobservable and decision costs exist an investor would profit more as a non-price-taker when his trading potential is large, and more as a price-taker when it is small. However, when the choice of behavior is observable it is the other way around. If various rounds of trading take place, an investor’s terminal endowment converges to his risk tolerance share. Thus, an efficient allocation is obtained. Furthermore, a paradox concerning the endogenous choice of manners of calculation is identified.

Keywords: price-taking; market liquidity; non-price-taking; strategic effect; welfare (search for similar items in EconPapers)
JEL-codes: C72 D43 D60 G10 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/bejte-2016-0119

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