Competing Mechanisms in a Common Value Environment
Bruno Biais, David Martimort, Jean-Charles Rochet
Econometrica · 2000 · Volume 68 · Issue 4
Abstract
Consider strategic risk-neutral traders competing in schedules to supply liquidity to a risk-averse agent who is privately informed about the value of the asset and his hedging needs. Imperfect competition in thiscommon value environmentis analyzed as amulti-principalgame in which liquidity suppliers offer trading mechanisms in a decentralized way. Each liquidity supplier behaves as a monopolist facing a residual demand curve resulting from the maximizing behavior of the informed agent and the trading mechanisms offered by his competitors. There exists a unique equilibrium in convex schedules. It is symmetric and differentiable and exhibits typical features of market-power: Equilibrium trading volume is lower than ex ante efficiency would require. Liquidity suppliers charge positive mark-ups and make positive expected profits, but these profits decrease with the number of competitors. In the limit, as this number goes to infinity, ask (resp. bid) prices converge towards the upper (resp. lower) tail expectations obtained in Glosten (1994) and expected profits are zero.
Keywords
Multi-principals, mechanism design, competing market-makers, financial markets microstructure.
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