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Order-Driven Markets are Almost Competitive

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  • Klaus Ritzberger

Abstract

This article studies a market game under uncertainty in which agents may submit multiple limit and market orders. When agents know their preferences at all states, the competitive equilibrium can be supported as a Nash equilibrium of the market game, that is, agents behave as if they were price takers. Therefore, if the associated competitive economy has a fully revealing rational expectations equilibrium, then so does the market game. This resolves the puzzle that agents behave as if prices were given, even though prices aggregate private information, at least for this "private values" case. Necessary conditions for Nash equilibrium show that the resulting allocation cannot deviate too far from a competitive equilibrium. When agents do not know their preferences at some states, though, a characterization result shows that the Nash equilibria of the market game tend to be far from competitive.

Suggested Citation

  • Klaus Ritzberger, 2016. "Order-Driven Markets are Almost Competitive," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 338-364.
    • Handle: RePEc:oup:restud:v:83:y:2016:i:1:p:338-364.
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    File URL: http://hdl.handle.net/10.1093/restud/rdv031
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    Cited by:

    1. Sjur Didrik Flåm, 2024. "Via Order Markets Towards Price-Taking Equilibrium," Journal of Optimization Theory and Applications, Springer, vol. 201(3), pages 977-994, June.
    2. Kumar, Gaurav & Misra, Arun Kumar, 2018. "Commonality in liquidity: Evidence from India’s National Stock Exchange," Journal of Asian Economics, Elsevier, vol. 59(C), pages 1-15.
    3. Brian Albrecht & Omar Al-Ubaydli & Peter Boettke, 2022. "Testing the Hayek hypothesis: Recent theoretical and experimental evidence," Artefactual Field Experiments 00759, The Field Experiments Website.
    4. Huang, Xuesong, 2021. "Incentive compatible self-fulfilling mechanisms and rational expectations," Games and Economic Behavior, Elsevier, vol. 126(C), pages 100-135.
    5. Gehrig, Thomas & Ritzberger, Klaus, 2022. "Intermediation and price volatility," Journal of Economic Theory, Elsevier, vol. 201(C).

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