Information, Market Power and Price Volatility

Dirk Bergemann, Tibor Heumann and Stephen Morris

No 2200, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We consider demand function competition with a finite number of agents and private information. We show that any degree of market power can arise in the unique equilibrium under an information structure that is arbitrarily close to complete information. In particular, regardless of the number of agents and the correlation of payoff shocks, market power may be arbitrarily close to zero (so we obtain the competitive outcome) or arbitrarily large (so there is no trade in equilibrium). By contrast, price volatility is always less than the variance of the aggregate shock across all information structures.

Keywords: Demand Function Competition; Supply Function Competition; Price Impact; Market Power; Incomplete Information; Price Volatility (search for similar items in EconPapers)
JEL-codes: C72 D43 D44 D83 G12 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2019-09
New Economics Papers: this item is included in nep-com, nep-des, nep-gth, nep-mic and nep-ore
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Published in Rand Journal of Economics, (Spring 2021), 52(1): 125-150

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Related works:
Journal Article: Information, market power, and price volatility (2021)
Working Paper: Information, Market Power and Price Volatility (2020)
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