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Strategic Effects between Price-takers and Non-price-takers

Author

Listed:
  • Hirth Hans
  • Walther Martin

    (Finance and Investment, Technische Universität Berlin, Sec. H 64, Straße des 17. Juni 135, 10623Berlin, Germany)

Abstract

Price-taking behavior seems to contradict rationality if a price effect is to be expected. This paper identifies a strategic effect between price-takers and non-price-takers on financial markets. It results from the liquidity reduction non-price-taking induces. Thus, a trade-off between the benefits of calculating price impacts correctly and market liquidity exists. It is shown that price-takers may benefit more from trading than their fully rational counterparts do. Moreover, it is demonstrated that when the choice of behavior is unobservable and decision costs exist an investor would profit more as a non-price-taker when his trading potential is large, and more as a price-taker when it is small. However, when the choice of behavior is observable it is the other way around. If various rounds of trading take place, an investor’s terminal endowment converges to his risk tolerance share. Thus, an efficient allocation is obtained. Furthermore, a paradox concerning the endogenous choice of manners of calculation is identified.

Suggested Citation

  • Hirth Hans & Walther Martin, 2018. "Strategic Effects between Price-takers and Non-price-takers," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(2), pages 1-18, July.
    • Handle: RePEc:bpj:bejtec:v:18:y:2018:i:2:p:18:n:6
    DOI: 10.1515/bejte-2016-0119
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    References listed on IDEAS

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    More about this item

    Keywords

    price-taking; market liquidity; non-price-taking; strategic effect; welfare;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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