Publisher:
Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science, Evanston, IL
Abstract:
An independent private values model of trade with m buyers and m sellers is considered in which price is chosen to equate revealed demand and supply. In ever symmetric Bayesian Nash equilibrium, each trader does not act as a price-taker, but instead strategically misrepresents his true demand/supply to influence price in his favor. This misrepresentation causes inefficiency. It is shown that the amount by which a trader misreports is 0(1/m) and the corresponding influence is 0(1/m). Price-taking behavior and its associated efficiency thus quickly emerges despite the asymmetric information and the noncooperative behavior of traders.
