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On Competitive Nonlinear Pricing

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

Abstract

Many financial markets rely on a discriminatory limit-order book to balance supply and demand. We study these markets in a static model in which uninformed market makers compete in nonlinear tariffs to trade with an informed insider, as in Glosten (1994), Biais, Martimort, and Rochet (2000), and Back and Baruch (2013). We analyze the case where tariffs are unconstrained and the case where tariffs are restricted to be convex. In both cases, we show that pure-strategy equilibrium tariffs must be linear and, moreover, that such equilibria only exist under exceptional circumstances. These results cast doubt on the stability of even well-organized financial markets.

Suggested Citation

  • Salanié, François & Mariotti, Thomas & Attar, Andrea, 2015. "On Competitive Nonlinear Pricing," CEPR Discussion Papers 10850, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10850
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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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