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Information, market power, and price volatility

Author

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  • Dirk Bergemann
  • Tibor Heumann
  • Stephen Morris

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. Regardless of the number of agents and the correlation of payoff shocks, market power may be arbitrarily close to zero (the competitive outcome) or arbitrarily large (so there is no trade). By contrast, price volatility is always lower than the variance of the aggregate shock across all information structures. Alternative trading mechanisms lead to very distinct bounds as a comparison with Cournot competition establishes.

Suggested Citation

  • Dirk Bergemann & Tibor Heumann & Stephen Morris, 2021. "Information, market power, and price volatility," RAND Journal of Economics, RAND Corporation, vol. 52(1), pages 125-150, March.
    • Handle: RePEc:bla:randje:v:52:y:2021:i:1:p:125-150
    DOI: 10.1111/1756-2171.12364
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    References listed on IDEAS

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    Cited by:

    1. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," Journal of Economic Theory, Elsevier, vol. 214(C).
    2. Michail Anthropelos & Scott Robertson, 2024. "Strategic Informed Trading and the Value of Private Information," Papers 2404.08757, arXiv.org, revised Mar 2025.
    3. Jason Allen & Milena Wittwer, 2023. "Intermediary Market Power and Capital Constraints," Staff Working Papers 23-51, Bank of Canada.
    4. Rahi, Rohit, 2021. "Information acquisition with heterogeneous valuations," Journal of Economic Theory, Elsevier, vol. 191(C).
    5. Lou, Youcheng & Rahi, Rohit, 2021. "Information, market power and welfare," LSE Research Online Documents on Economics 118843, London School of Economics and Political Science, LSE Library.
    6. Bayona, Anna & Manzano, Carolina, 2024. "Competition in schedules with cursed traders," Journal of Economic Theory, Elsevier, vol. 222(C).
    7. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," LSE Research Online Documents on Economics 120479, London School of Economics and Political Science, LSE Library.

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    More about this item

    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
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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