Price Discrimination In A Competitive Market With Informed Traders
No 292678, SSRI Workshop Series from University of Wisconsin-Madison, Social Systems Research Institute
In virtually all previous work concerning informed trading on stock markets or futures markets those with inside information could trade only once on the basis of their information. This paper gives a more appropriate model of informed trade by permitting agents to make transactions with different market makers. A competitive equilibrium always exists in this model, but perfect price discrimination is not possible since a trader does not signal perfectly (i.e., completely reveal his information) until he has finished trading. Because of this, those who make large aggregate transactions will get capital gains. Another feature of this sequential revelation model is that there will generally be a price correction after a trader exits. This follows because traders are facing a sequence of "pooling prices".
Keywords: Research; Methods/; Statistical; Methods (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwssri:292678
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