Discussion Paper Details

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Title: Information, Market Power and Price Volatility

Author(s): Dirk Bergemann, Tibor Heumann and Stephen Morris

Publication Date: July 2020

Keyword(s): Cournot Competition, Demand function competition, incomplete information, market power, price impact, Price volatility and Supply function competition

Programme Area(s): Industrial Organization

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 payo¤ 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.

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Bibliographic Reference

Bergemann, D, Heumann, T and Morris, S. 2020. 'Information, Market Power and Price Volatility'. London, Centre for Economic Policy Research.