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Endogenous market power

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  • Weretka, Marek

Abstract

In this paper we develop a framework to study markets with heterogeneous atomic traders. The competitive model is augmented as we provide traders with correct beliefs about their price impacts to define equilibrium with endogenously determined market power and show that such equilibrium exists in economies with smooth utility and cost functions and is generically determinate. Tradersʼ price impacts depend positively on the convexity of preferences or cost functions of the trading partners and are subject to mutual reinforcement. Compared to the competitive model, the volume of trade is reduced, and hence is Pareto inefficient. The price effects of non-competitive trading depend on the convexity of marginal utility or cost function.

Suggested Citation

  • Weretka, Marek, 2011. "Endogenous market power," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2281-2306.
    • Handle: RePEc:eee:jetheo:v:146:y:2011:i:6:p:2281-2306
    DOI: 10.1016/j.jet.2011.10.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Andrés Carvajal, 2018. "Arbitrage pricing in non-Walrasian financial markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(4), pages 951-978, December.
    2. Puru Gupta & Saul D. Jacka, 2023. "Portfolio Choice In Dynamic Thin Markets: Merton Meets Cournot," Papers 2309.16047, arXiv.org.
    3. Peter Bank & Dmitry Kramkov, 2015. "A model for a large investor trading at market indifference prices. I: Single-period case," Finance and Stochastics, Springer, vol. 19(2), pages 449-472, April.
    4. Manitra A. Rakotoarisoa, 2016. "Trade with Endogenous Market Power Under Asymmetric and Incomplete Information," Journal of Industry, Competition and Trade, Springer, vol. 16(4), pages 423-440, December.
    5. Marek Weretka & Daniel Quint, 2022. "Slope-takers in anonymous markets," GRAPE Working Papers 64, GRAPE Group for Research in Applied Economics.
    6. Michail Anthropelos & Constantinos Kardaras & Georgios Vichos, 2020. "Effective risk aversion in thin risk‐sharing markets," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1565-1590, October.
    7. Daniel Neuhann & Michael Sockin, 2019. "Risk-Sharing and Investment in Concentrated Markets," 2019 Meeting Papers 118, Society for Economic Dynamics.
    8. Michail Anthropelos & Constantinos Kardaras, 2018. "Price Impact Under Heterogeneous Beliefs and Restricted Participation," Papers 1802.09954, arXiv.org, revised Dec 2023.
    9. Andrés Carvajal & Marek Weretka, 2012. "No-arbitrage, state prices and trade in thin financial markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(1), pages 223-268, May.
    10. Haita, Corina, 2014. "Endogenous market power in an emissions trading scheme with auctioning," Resource and Energy Economics, Elsevier, vol. 37(C), pages 253-278.
    11. Tanaka, Kenta & Matsukawa, Isamu & Managi, Shunsuke, 2020. "An experimental investigation of bilateral oligopoly in emissions trading markets," China Economic Review, Elsevier, vol. 59(C).
    12. Semyon Malamud & Marzena Rostek, 2017. "Decentralized Exchange," American Economic Review, American Economic Association, vol. 107(11), pages 3320-3362, November.

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    More about this item

    Keywords

    Price impacts; Walrasian auction; Competitive equilibrium;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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