Market Power, Survival and Accuracy of Predictions in Financial Markets

Abstract

In a standard General Equilibrium framework, we consider an agent strategically using her large volume of trade to influence asset prices to increase her consumption. We show that, as in Sandroni (2000) for the competitive case, if markets are dynamically complete and some general conditions on market preferences are met then this agent' long-run consumption will vanish if she makes less accurate predictions than the market, and will maintain her market power otherwise. We thus argue that the Market Selection Hypothesis extends to this situation of market power, in contrast to Alchian (1950) and Friedman (1953) who claimed that this selection was solely driven by the competitiveness of markets.Market selection hypothesis, Market power, Survival, Assset pricing