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Market Power and Welfare in Asymmetric Divisible Good Auctions

Author

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  • Carolina Manzano
  • Xavier Vives
Abstract
We analyze a divisible good uniform-price auction that features two groups each with a finite number of identical bidders and present conditions under which a unique privately revealing equilibrium exists. We derive novel comparative static results highlighting that increases in transaction costs and noise in the signals of a group reinforce each other in making demand schedules of both groups steeper. If the correlation of values of the groups raises, as in a crisis situation, then the illiquidity e¤ect is further reinforced. A “stronger” bidding group -which has more precise private information, faces lower transaction costs, and is more oligopsonistic- has more market power (price impact) and so will behave competitively only if it receives a higher per capita subsidy rate. When the strong group values the asset no less than the weak group, the expected deadweight loss increases with the quantity auctioned and also with the degree of payoff asymmetries. Price impact and the deadweight loss may be negatively associated and market integration may reduce welfare. The results are consistent with the available empirical evidence.

Suggested Citation

  • Carolina Manzano & Xavier Vives, 2016. "Market Power and Welfare in Asymmetric Divisible Good Auctions," CESifo Working Paper Series 6261, CESifo.
    • Handle: RePEc:ces:ceswps:_6261
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    References listed on IDEAS

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    2. Lou, Youcheng & Rahi, Rohit, 2021. "Information, market power and welfare," LSE Research Online Documents on Economics 118843, London School of Economics and Political Science, LSE Library.
    3. Lou, Youcheng & Yang, Yaqing, 2023. "Information linkages in a financial market with imperfect competition," Journal of Economic Dynamics and Control, Elsevier, vol. 150(C).
    4. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," Journal of Economic Theory, Elsevier, vol. 214(C).
    5. Youcheng Lou, 2023. "On the functional equivalence of two perfectly competitive economies with negative exponential utility and linear utility with a quadratic holding cost," Mathematics and Financial Economics, Springer, volume 17, number 4, March.
    6. Glebkin, Sergei & Kuong, John Chi-Fong, 2023. "When large traders create noise," Journal of Financial Economics, Elsevier, vol. 150(2).
    7. Lou, Youcheng & Rahi, Rohit, 2023. "Information, market power and welfare," LSE Research Online Documents on Economics 120479, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    demand; supply schedule competition; private information; liquidity auctions; treasury auctions; electricity auctions; market integration;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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