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On Competitive Nonlinear Pricing

Attar, Andrea, Mariotti, Thomas and Salanié, François (2019) On Competitive Nonlinear Pricing. Theoretical Economics, vol. 14 (n° 1). pp. 297-343.

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Official URL: http://tse-fr.eu/pub/32852

Abstract

We study a discriminatory limit-order book in which market makers compete in nonlinear tariffs to serve a privately informed insider. Our model allows for general nonparametric specifications of preferences and arbitrary discrete distributions for the insider's private information. Adverse selection severely restricts equilibrium outcomes: in any pure-strategy equilibrium with convex tariffs, pricing must be linear and at most one type can trade, leading to an extreme form of market breakdown. As a result, such equilibria only exist under exceptional circumstances that we fully characterize. These results are strikingly different from those of existing analyses that postulate a continuum of types. The two approaches can be reconciled when we consider "- equilibria of games with a large number of market makers or a large number of types.

Item Type: Article
Language: English
Date: January 2019
Refereed: Yes
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
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 20 Jul 2018 09:21
Last Modified: 30 Jan 2020 18:44
["eprint_fieldname_oai_identifier" not defined]: oai:tse-fr.eu:32852
URI: http://publications.ut-capitole.fr/id/eprint/26141

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