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On competitive nonlinear pricing.

Attar, Andrea, Mariotti, Thomas and Salanié, François (2016) On competitive nonlinear pricing. TSE Working Paper, n. 16-737, Toulouse

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We study a discriminatory limit-order book in which uninformed market makers compete in nonlinear tariffs to serve an informed insider. Our model allows for general nonparametric specifications of preferences and for arbitrary discrete distributions for the insider's private information. We show that adverse selection severely restricts possible equilibrium outcomes: in any pure-strategy equilibrium, tariffs must be linear and at most one type may trade, leading to an extreme form of market breakdown. As a result, such equilibria only exist under exceptional circumstances. The Bertrandlike logic underlying these results markedly differs from Cournot-like analyses of the limit-order book that postulate a continuum of types. We argue that these contrasting outcomes can be reconciled when one considers "-equilibria of either the game with a large number of market makers or the game with a large number of insider types. Mixed-strategy equilibria, by contrast, lead to a new class of equilibrium predictions that calls for further analysis.

Item Type: Monograph (Working Paper)
Language: English
Date: November 2016
Place of Publication: Toulouse
Uncontrolled Keywords: Adverse Selection, Competing Mechanisms, Limit-Order Book
JEL Classification: D43 - Oligopoly and Other Forms of Market Imperfection
D82 - Asymmetric and Private Information
D86 - Economics of Contract - Theory
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Institution: Universite Toulouse 1 Capitole
Site: UT1
Date Deposited: 23 Nov 2016 08:56
Last Modified: 08 Apr 2021 12:24
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