On competitive nonlinear pricing

Andrea Attar, Thomas Mariotti () and François Salanié
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Thomas Mariotti: Toulouse School of Economics, CNRS, University of Toulouse Capitole

Theoretical Economics, 2019, vol. 14, issue 1

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 only exist 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 E-equilibria of games with a large number of market makers or a large number of types.

Keywords: Adverse selection; competing mechanisms; limit-order book (search for similar items in EconPapers)
JEL-codes: D43 D82 D86 (search for similar items in EconPapers)
Date: 2019-01-30
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: 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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