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Trade with Endogenous Market Power Under Asymmetric and Incomplete Information

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  • Manitra A. Rakotoarisoa

    (Food and Agriculture Organization of the United Nations)

Abstract

This paper addresses whether or not trade under both asymmetric information and endogenous market power fits standard assumptions and outcomes of mechanism design of imperfect competition. I analyse the outcomes of a bilateral trade in which a manufacturer (the principal) purchases n inputs from a seller (the agent). Each input has a continuum of types, but the principal has no information on these input types, excepting their distributions. The model allows input types to shift input supply curves and flexibly accounts for any endogenous monopsony power (i.e., determined by the mechanism). Focusing on an optimal Bayesian mechanism, I find that the monotonicity assumption may not be enough to ensure price discrimination based on type. Truthful implementation implies that when allocation is increasing and weakly convex (curvature zero or positive) in the input type, the principal’s monopsony power decreases as the input type increases (i.e., is higher near competitive price for higher input type). However, under increasing but concave allocation, ambiguity remains as it is no longer guaranteed that high types would receive high prices. I also examine some extensions of the analysis in the cases of a benevolent principal and a mechanism with multiple agents. The findings provide explanation to real-world situations where input attribute affects market power of either player and to the functioning of many markets of goods and services under asymmetric and incomplete information.

Suggested Citation

  • 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.
  • Handle: RePEc:kap:jincot:v:16:y:2016:i:4:d:10.1007_s10842-016-0217-0
    DOI: 10.1007/s10842-016-0217-0
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    References listed on IDEAS

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    Cited by:

    1. Xinyi Xie & Liming Ying & Xue Cui, 2022. "Price Strategy Analysis of Electricity Retailers Based on Evolutionary Game on Complex Networks," Sustainability, MDPI, vol. 14(15), pages 1-17, August.

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    More about this item

    Keywords

    D4 market structure and pricing; L1 market structure; firm strategy; and market performance; D8 information; knowledge; and uncertainty; C7 game theory and bargaining theory;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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