Information Percolation in Segmented Markets

We calculate equilibria of dynamic double-auction markets in which agents aredistinguished by their preferences and information. Over time, agents are privatelyinformed by bids and offers. Investors are segmented into groups that differ withrespect to characteristics determining information quality, including initial infor-mation precision as well as market “connectivity,” the expected frequency of theirtrading opportunities. Investors with superior information sources attain strictlyhigher expected profits, provided their counterparties are unable to observe thequality of those sources. If, however, the quality of bidders’ information sourcesare commonly observable, then, under conditions, investors with superior informa-tion sources have strictly lower expected profits.[...]