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Noise and competition in strategic oligopoly

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  • Dridi, Ramdan
  • Germain, Laurent

Abstract

In this paper, we propose a model where N strategic informed traders who are endowed with heterogeneous noisy signals with different precisions compete in a market with a single risky asset. We explicitly describe the unique linear equilibrium that exists in this setup and derive its properties. Moreover, we focus on the effects of noise on the competition between traders. We show that noise softens the competition between traders. In particular, for N exceeding three and for certain sets of noise in traders' signals, each trader's individual profit is greater than the one obtained in the case of perfect information.

Suggested Citation

  • Dridi, Ramdan & Germain, Laurent, 2009. "Noise and competition in strategic oligopoly," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 311-327, April.
  • Handle: RePEc:eee:jfinin:v:18:y:2009:i:2:p:311-327
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    References listed on IDEAS

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    1. Admati, Anat R & Pfleiderer, Paul, 1988. "Selling and Trading on Information in Financial Markets," American Economic Review, American Economic Association, vol. 78(2), pages 96-103, May.
    2. Germain, Laurent, 2005. "Strategic noise in competitive markets for the sale of information," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 179-209, April.
    3. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    4. Kerry Back & C. Henry Cao & Gregory A. Willard, 2000. "Imperfect Competition among Informed Traders," Journal of Finance, American Finance Association, vol. 55(5), pages 2117-2155, October.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    6. Admati, Anat R. & Pfleiderer, Paul, 1986. "A monopolistic market for information," Journal of Economic Theory, Elsevier, vol. 39(2), pages 400-438, August.
    7. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    8. Admati, Anat R & Pfleiderer, Paul, 1990. "Direct and Indirect Sale of Information," Econometrica, Econometric Society, vol. 58(4), pages 901-928, July.
    9. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-1478, September.
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    Cited by:

    1. Boco, Hervé & Germain, Laurent & Rousseau, Fabrice, 2016. "Heterogeneous noisy beliefs and dynamic competition in financial markets," Economic Modelling, Elsevier, vol. 54(C), pages 347-363.
    2. Fabrice Rousseau & Hervé Boco & Laurent Germain, 2015. "Heterogeneous Beliefs and Imperfect Competition in Sequential Auction Markets," Economics, Finance and Accounting Department Working Paper Series n258-15.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.

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