Strategic Supply Function Competition with Private Information

By Xavier Vives. Social Science Research Network, 2008

399 citations recorded by the source corpus.

A Bayesian supply function equilibrium is characterized in a market where firms have private information about their uncertain costs. It is found that with supply function competition, and in contrast to Bayesian Cournot competition, competitiveness is affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Furthermore, competition in supply functions aggregates the dispersed information of firms (the equilibrium is privately revealing) while Cournot competition does not. The implication is that with the former the only source of deadweight loss is market power while with the latter we have to add private information. As the market grows large the equilibrium becomes competitive and we obtain an approximation to how many competitors are needed to have a certain degree of competitiveness.

Subfields: Management Information Systems, Management Science and Operations Research, Marketing

View Paper: https://www.semanticscholar.org/paper/21c7f9b068c332128923a79e5d779954b280c15e

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Management Information Systems

1. S. Ateş
2. Ufuk Akcigit
3. Marzena Rostek
4. Marek Weretka
5. Songzi Du
6. Haoxiang Zhu

In Management Science and Operations Research

1. S. Ateş
2. Ufuk Akcigit
3. Marzena Rostek
4. Marek Weretka
5. Songzi Du
6. Haoxiang Zhu

In Marketing

1. S. Ateş
2. Ufuk Akcigit
3. Marzena Rostek
4. Marek Weretka
5. Songzi Du
6. Haoxiang Zhu

Citations in the corpus

• Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory (2019, background): “27 Vives (2011) and Bergemann, Heumann, and Morris (2015) provide theoretical underpinnings of the interaction between private information and market power—i.e., the ability to affect prices—in the context of supply- and demand-schedule competition, respectively.”
• PRICE INFERENCE IN SMALL MARKETS (2012, methodology): “Substituting for expectation from (12) into price p , and using that in the symmetric equilibrium inference coe¢ cients cp and cs are common to all traders, gives the price”
• What Is the Optimal Trading Frequency in Financial Markets (2017, background): “…is the opposite: a higher σ2w implies larger gains from trade, and hence more aggressive bidding and faster convergence to the competitive allocation.10 The effects of n, σ2D and σ 2 w on bidding aggressiveness are present in the earlier static models of Vives (2011) and Rostek and Weretka (2012).”
• Competition in Electricity Markets with Renewable Energy Sources (2017, neutral): “A special case of this information structure (when for all ) is used by Vives (2011). j j i , j Allowing for = i , j unequal ’s is important in our setting since it permits the presence of asymmetric equilibria, which is what we characterize j i , j as the correlation structure (network…”