Information Precision and Asymptotic Efficiency of Industrial Markets

Online market places have an unprecedented power of bringing together a large number of buyers and sellers and aggregating information. Despite its benefits, this scale of aggregation of private information may bring about adverse effects that can cause ine±ciencies, which can be ignored by conventional analysis. In this paper, I present a strategic model of a large industrial market with asymmetric information to examine (i) the validity of the conjecture of price-taking behavior in such markets as the number of agents becomes large; (ii) the effect of the rate that individual information precision decreases with increased number of agents on convergence to price-taking and e±ciency. I show that in an industrial market with downstream competition, increasing the number of sellers may make all participants price-takers in the limit, but increasing the number of buyers may not. When the total precision of information in the market is high, price taking and full social e±ciency is achieved in the limit with large numbers of buyers and sellers. However, if the total precision of information in the market is poor, large ine±ciencies, including full ine±ciency, can occur in the limiting outcome. The rate of decrease of individual information precision with increased number of agents determines the rate of convergence to efficiency, and the convergence is slower than that predicted by the single unit trading models in the literature

Information Precision and Asymptotic Efficiency of Industrial Markets

Online market places have an unprecedented power of bringing together a large number of buyers and sellers and aggregating information. Despite its benefits, this scale of aggregation of private information may bring about adverse effects that can cause ine±ciencies, which can be ignored by conventional analysis. In this paper, I present a strategic model of a large industrial market with asymmetric information to examine (i) the validity of the conjecture of price-taking behavior in such markets as the number of agents becomes large; (ii) the effect of the rate that individual information precision decreases with increased number of agents on convergence to price-taking and e±ciency. I show that in an industrial market with downstream competition, increasing the number of sellers may make all participants price-takers in the limit, but increasing the number of buyers may not. When the total precision of information in the market is high, price taking and full social e±ciency is achieved in the limit with large numbers of buyers and sellers. However, if the total precision of information in the market is poor, large ine±ciencies, including full ine±ciency, can occur in the limiting outcome. The rate of decrease of individual information precision with increased number of agents determines the rate of convergence to efficiency, and the convergence is slower than that predicted by the single unit trading models in the literature

Trade in bilateral oligopoly with endogenous market formation

We study a strategic market game in which traders are endowed with both a good and money and can choose whether to buy or sell the good. We derive conditions under which a non-autarkic equilibrium exists and when the only equilibrium is autarky. Autarky is ‘nice’ (robust to small perturbations in the game) when it is the only equilibrium, and ‘very nice’ (robust to large perturbations) when no gains from trade exist. We characterize economies where autarky is nice but not very nice; that is, when gains from trade exist and yet no trade takes place

Bilateral oligopoly and quantity competition

Bilateral oligopoly is a strategic market game with two commodities, allowing strategic behavior on both sides of the market. When the number of buyers is large, such a game approximates a game of quantity competition played by sellers. We present examples which show that this is not typically a Cournot game. Rather, we introduce an alternative game of quantity competition (the market share game) and, appealing to results in the literature on contests, show that this yields the same equilibria as the many-buyer limit of bilateral oligopoly, under standard assumptions on costs and preferences. We also show that the market share and Cournot games have the same equilibria if and only if the price elasticity of the latter is one. These results lead to necessary and su¢ cient conditions for the Cournot game to be a good approximation to bilateral oligopoly with many buyers and to an ordering of total output when they are not satisfied.Quantity competition, Cournot, strategic foundation, commitment

Decentralization of the core through Nash equilibrium

We show that in large finite economies, core allocations can be approximately decentralized as Nash (rather than Walras) equilibrium. We argue that this excrcise is an essential complement to asymptotic core equivalence results, because it implies that in some approximate sense individual attempts to manipulate the decentralizing prices cannot be beneficial, which fits precisely the interpretation of asymptotic core convergence, namely the emergence of price taking.core, Nash equilibrium, asymptotic proximity, decentralization.

Competitive Rational Expectations Equilibria without Apology

In a standard financial market model with asymmetric information with a finite number N of risk-averse informed traders, competitive rational expectations equilibria provide a good approximation to strategic equilibria as long as N is not too small: equilibrium prices in eachsituation converge to each other at a rate of 1/N as the market becomes large. Theapproximation is particularly good when the informationally adjusted risk bearing capacity of traders is not very large. This is not the case if informed traders are close to risk neutral. Both equilibria converge to the competitive equilibrium of an idealized limit continuum economy as the market becomes large at a slower rate of 1/ãN and, therefore, the limit equilibrium need not be a good approximation of the strategic equilibrium in moderately large markets.gschizophreniah problem, strategic equilibrium, large markets, information acquisition, free entry, rate of convergence

The Strategic Impact of Pace in Double Auction Bargaining

This paper evaluates performance of human subjects and instances of a bidding model that interact in continuous ­time double auction experiments. Asks submitted by instances of the seller model (``automated sellers'') maximize the seller's expected surplus relative to a heuristic belief function, and arrive stochastically according to an exponential distribution. Automated buyers are similar. Across experiment sessions we vary the exponential distribution parameters of automated sellers and buyers in order to assess the impact of the relative pace of asks and bids on the performance of both human subjects and the automated sellers and buyers. In these experiments, prices converge and allocations converge to efficiency, yet the split of surplus typically differs significantly from the equilibrium split. In order to evaluate the impact of pace, a statistical model is developed in which the relative performance of sellers to buyers is examined as a function of the profile of types present in each experiment session. This econometric model demonstrates that (1) human buyers outperform human sellers, (2) automated sellers and buyers with a longer expected time between asks or bids outperform faster automated sellers and buyers, and (3) the performance of the faster automated buyers is comparable to that of human buyers.Double auction, experimental economics, bounded rationality