Bid-Ask Price Competition with Asymmetric Information between Market-Makers

Riccardo Calcagno and Stefano Lovo

The Review of Economic Studies, 2006, vol. 73, issue 2, 329-355

Abstract: This paper studies the effect of asymmetric information on the price formation process in a quote-driven market. One market-maker receives private information on the value of the quoted asset and repeatedly competes with market-makers who are uninformed. We show that despite the fact that the informed market-maker's quotes are public, the market is never strong-form efficient with certainty until the last stage. We characterize a reputational equilibrium in which the informed market-maker influences and possibly misleads the uninformed market-makers' beliefs. At this equilibrium, a price leadership effect arises, the informed market-maker's expected pay-off is positive and the rate of price discovery increases in the last stages of trade. Copyright 2006, Wiley-Blackwell.

Date: 2006
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Related works:
Working Paper: Bid-Ask Price Competition with Asymmetric Information between Market-Makers (2006)
Working Paper: Bid-Ask Price Competition with Asymmetric Information between Market-Makers (2006)
Working Paper: Bid Ask Price Competition with Asymmetric Information Between Market Makers (2006)
Working Paper: Bid Ask Price Competition with Asymmetric Information Between Market Makers (1998)
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