Information Precision and Asymptotic Efficiency of Industrial Markets
Online market places have an unprecedented power of bringing together alarge number of buyers and sellers and aggregating information. Despiteits benefits, this scale of aggregation of private information may bringabout adverse effects that can cause ine±ciencies, which can beignored by conventional analysis. In this paper, I present a strategicmodel of a large industrial market with asymmetric information toexamine (i) the validity of the conjecture of price-taking behavior insuch markets as the number of agents becomes large; (ii) the effect ofthe rate that individual information precision decreases with increasednumber of agents on convergence to price-taking and e±ciency. Ishow that in an industrial market with downstream competition,increasing the number of sellers may make all participants price-takersin the limit, but increasing the number of buyers may not. When thetotal precision of information in the market is high, price taking andfull social e±ciency is achieved in the limit with large numbersof buyers and sellers. However, if the total precision of information inthe market is poor, large ine±ciencies, including fulline±ciency, can occur in the limiting outcome. The rate ofdecrease of individual information precision with increased number ofagents determines the rate of convergence to efficiency, and theconvergence is slower than that predicted by the single unit tradingmodels in the literature.
Year of publication: |
2004
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Authors: | Tunca, Tunay I. |
Institutions: | Stanford University |
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