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Market Selection and the Information Content of Prices

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  • Atakan, Alp Enver
  • Ekmekci, Mehmet

Abstract

We study price formation in a large, common-value auction where buyers choose, based on their private information, between bidding in the auction and an outside option. The distribution of bidders participating in the auction is determined endogenously in equilib- rium. We first focus on an outside option whose value is state dependent and positively correlated with the common-value object on auction. If the outside option’s expected value is non-negative and its variance is positive, then information is not aggregated in the auction in any equilibrium. We then turn to a model where bidders choose to partic- ipate in one of two concurrently operating auction markets. The outside option for one auction is the equilibrium value of participating in the alternative auction, i.e., outside options are endogenously determined. If frictions lead to uncertain gains from trade in the first auction, then information is not aggregated in either market even if the second auction is frictionless. This is because the two auction markets serve as outside options with positive variance for each other. Our findings are driven by how bidders self-select across options: A large disparity in the payoff variance of the two options implies that optimistic bidders select the option with higher variance while pessimistic bidders select the option with lower variance. Our results suggest a novel mechanism through which market imperfections in one market can have widespread effects across all linked markets.

Suggested Citation

  • Atakan, Alp Enver & Ekmekci, Mehmet, 2016. "Market Selection and the Information Content of Prices," MPRA Paper 75632, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:75632
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    References listed on IDEAS

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    1. Stephan Lauermann & Asher Wolinsky, 2017. "Bidder Solicitation, Adverse Selection, and the Failure of Competition," American Economic Review, American Economic Association, vol. 107(6), pages 1399-1429, June.
    2. Stephan Lauermann & Andre Speit, 2023. "Bidding in Common‐Value Auctions With an Unknown Number of Competitors," Econometrica, Econometric Society, vol. 91(2), pages 493-527, March.

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    More about this item

    Keywords

    Auctions; Large markets; Information Aggregation.;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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