On Competitive Nonlinear Pricing

Andrea Attar, Thomas Mariotti and François Salanié

No 16-737, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We study a discriminatory limit-order book in which uninformed market makers compete in nonlinear tariffs to serve an informed insider. Our model allows for general nonparametric specifications of preferences and for arbitrary discrete distributions for the insider's private information. We show that adverse selection severely restricts possible equilibrium outcomes: in any pure-strategy equilibrium, tariffs must be linear and at most one type may trade, leading to an extreme form of market breakdown. As a result, such equilibria only exist under exceptional circumstances. The Bertrandlike logic underlying these results markedly differs from Cournot-like analyses of the limit-order book that postulate a continuum of types. We argue that these contrasting outcomes can be reconciled when one considers "-equilibria of either the game with a large number of market makers or the game with a large number of insider types. Mixed-strategy equilibria, by contrast, lead to a new class of equilibrium predictions that calls for further analysis.

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: 2016-11, Revised 2018-03
New Economics Papers: this item is included in nep-com and nep-mic
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Related works:
Journal Article: On competitive nonlinear pricing (2019)
Working Paper: On competitive nonlinear pricing (2019)
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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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:26891

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