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On Competitive Nonlinear Pricing

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  • Attar, Andrea
  • Mariotti, Thomas
  • Salanié, François

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.

Suggested Citation

  • Attar, Andrea & Mariotti, Thomas & Salanié, François, 2016. "On Competitive Nonlinear Pricing," IDEI Working Papers 866, Institut d'Économie Industrielle (IDEI), Toulouse, revised Mar 2018.
  • Handle: RePEc:ide:wpaper:31204
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    References listed on IDEAS

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    Cited by:

    1. Andrea Attar & Thomas Mariotti & François Salanié, 2021. "Entry-Proofness and Discriminatory Pricing under Adverse Selection," American Economic Review, American Economic Association, vol. 111(8), pages 2623-2659, August.
    2. Andrea Attar & Thomas Mariotti & François Salanié, 2020. "The Social Costs of Side Trading," The Economic Journal, Royal Economic Society, vol. 130(630), pages 1608-1622.
    3. David Martimort & Aggey Semenov & Lars Stole, 2016. "A Complete Characterization of Equilibria in Common Agency Screening Games," Working Papers 1618E, University of Ottawa, Department of Economics.
    4. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2021. "Competitive Nonlinear Pricing under Adverse Selection," TSE Working Papers 21-1201, Toulouse School of Economics (TSE), revised Aug 2022.
    5. Thomas Mariotti, 2016. "Multiple Contracting in Insurance Markets," 2016 Meeting Papers 820, Society for Economic Dynamics.
    6. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2014. "Multiple Contracting in Insurance Markets," TSE Working Papers 14-532, Toulouse School of Economics (TSE), revised Sep 2016.
    7. Attar, Andrea & Mariotti, Thomas & Salanié, François, 2017. "Private Information and Insurance Rejections: A comment," IDEI Working Papers 868, Institut d'Économie Industrielle (IDEI), Toulouse.
    8. Baruch, Shmuel & Glosten, Lawrence R., 2019. "Tail expectation and imperfect competition in limit order book markets," Journal of Economic Theory, Elsevier, vol. 183(C), pages 661-697.
    9. , & , & ,, 2014. "Nonexclusive competition under adverse selection," Theoretical Economics, Econometric Society, vol. 9(1), January.
    10. Bayrak, Halil İbrahim & Dalkıran, Nuh Aygün, 2022. "Nonexclusive competition for a freelancer under adverse selection," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    11. Martin Herdegen & Johannes Muhle-Karbe & Florian Stebegg, 2021. "Liquidity Provision with Adverse Selection and Inventory Costs," Papers 2107.12094, arXiv.org.
    12. Martimort, David & Semenov, Aggey & Stole, Lars, 2015. "A Complete Characterization of Equilibria in Two-type Common Agency Screening Games," MPRA Paper 66620, University Library of Munich, Germany.

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    More about this item

    Keywords

    Adverse Selection; Competing Mechanisms; Limit-Order Book;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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