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Strategic Supply Function Competition With Private Information

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  • Xavier Vives

Abstract

A finite number of sellers (n) compete in schedules to supply an elastic demand. The costs of the sellers have uncertain common and private value components and there is no exogenous noise in the system. A Bayesian supply function equilibrium is characterized; the equilibrium is privately revealing and the incentives to acquire information are preserved. Price-cost margins and bid shading are affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Private information coupled with strategic behavior induces additional distortionary market power above full information levels and welfare losses which can be counteracted by subsidies. As the market grows large the equilibrium becomes price-taking, bid shading is of the order of 1/ n , and the order of magnitude of welfare losses is 1/ n2 . The results extend to demand schedule competition and a range of applications in product and financial markets are presented.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 79 (2011)
Issue (Month): 6 (November)
Pages: 1919-1966

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Handle: RePEc:ecm:emetrp:v:79:y:2011:i:6:p:1919-1966

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Citations

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Cited by:
  1. Vives, Xavier, 2010. "Asset Auctions, Information, and Liquidity," CEPR Discussion Papers 7670, C.E.P.R. Discussion Papers.
  2. Bert WILLEMS & Ina RUMIANTSEVA & Hannes WEIGT, 2007. "Cournot versus supply functions: what does the data tell us?," Center for Economic Studies - Discussion papers ces0720, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  3. Ana Babus & Péter Kondor, 2012. "Trading and Information Diffusion in Over-the-Counter Markets," CEU Working Papers 2012_19, Department of Economics, Central European University, revised 09 Dec 2012.
  4. Flavio Menezes & John Quiggin & Tina Kao, 2012. "Optimal Access Regulation with Downstream Competition," Discussion Papers Series 473, School of Economics, University of Queensland, Australia.
  5. Andrea Attar & Thomas Mariotti & François Salanié, 2011. "Non-Exclusive Competition under Adverse Selection," CEIS Research Paper 192, Tor Vergata University, CEIS, revised 31 Mar 2011.
  6. Xavier Vives, 2011. "A Large-Market Rational Expectations Equilibrium Model," CESifo Working Paper Series 3485, CESifo Group Munich.
  7. David Malueg & Andrew Yates, 2009. "Bilateral Oligopoly, Private Information, and Pollution Permit Markets," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 43(4), pages 553-572, August.

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