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Endogenous market power

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  • Weretka, Marek

Abstract

In this paper we develop a framework to study markets with heterogeneous atomic traders. The competitive model is augmented as we provide traders with correct beliefs about their price impacts to define equilibrium with endogenously determined market power and show that such equilibrium exists in economies with smooth utility and cost functions and is generically determinate. Tradersʼ price impacts depend positively on the convexity of preferences or cost functions of the trading partners and are subject to mutual reinforcement. Compared to the competitive model, the volume of trade is reduced, and hence is Pareto inefficient. The price effects of non-competitive trading depend on the convexity of marginal utility or cost function.

Suggested Citation

  • Weretka, Marek, 2011. "Endogenous market power," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2281-2306.
  • Handle: RePEc:eee:jetheo:v:146:y:2011:i:6:p:2281-2306
    DOI: 10.1016/j.jet.2011.10.002
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    References listed on IDEAS

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    1. Frank Hahn, 1978. "On Non-Walrasian Equilibria," Review of Economic Studies, Oxford University Press, vol. 45(1), pages 1-17.
    2. Hahn, Frank H, 1977. " Exercises in Conjectural Equilibria," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(2), pages 210-226.
    3. Martin K. Perry, 1982. "Oligopoly and Consistent Conjectural Variations," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 197-205, Spring.
    4. Oliver D. Hart, 1979. "Monopolistic Competition in a Large Economy with Differentiated Commodities," Review of Economic Studies, Oxford University Press, vol. 46(1), pages 1-30.
    5. Robson, Arthur J, 1983. "Existence of Consistent Conjectures: Comment," American Economic Review, American Economic Association, vol. 73(3), pages 454-456, June.
    6. Grossman, Sanford J, 1981. "Nash Equilibrium and the Industrial Organization of Markets with Large Fixed Costs," Econometrica, Econometric Society, vol. 49(5), pages 1149-1172, September.
    7. Bresnahan, Timothy F, 1983. "Existence of Consistent Conjectures: Reply," American Economic Review, American Economic Association, vol. 73(3), pages 457-458, June.
    8. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    9. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    10. Bresnahan, Timothy F, 1981. "Duopoly Models with Consistent Conjectures," American Economic Review, American Economic Association, vol. 71(5), pages 934-945, December.
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    Citations

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    Cited by:

    1. Manitra A. Rakotoarisoa, 2016. "Trade with Endogenous Market Power Under Asymmetric and Incomplete Information," Journal of Industry, Competition and Trade, Springer, vol. 16(4), pages 423-440, December.
    2. repec:aea:aecrev:v:107:y:2017:i:11:p:3320-62 is not listed on IDEAS
    3. Haita, Corina, 2014. "Endogenous market power in an emissions trading scheme with auctioning," Resource and Energy Economics, Elsevier, vol. 37(C), pages 253-278.
    4. Michail Anthropelos & Constantinos Kardaras, 2018. "Equilibrium in thin security markets under restricted participation," Papers 1802.09954, arXiv.org.
    5. Peter Bank & Dmitry Kramkov, 2015. "A model for a large investor trading at market indifference prices. I: Single-period case," Finance and Stochastics, Springer, vol. 19(2), pages 449-472, April.

    More about this item

    Keywords

    Price impacts; Walrasian auction; Competitive equilibrium;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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