Wednesday, December 5, 2012
Posted by D. Daniel Sokol
Manuel Mueller-Frank, University of Oxford describes Market Power, Fully Revealing Prices and Welfare.
ABSTRACT: This paper considers a dynamic duopoly market with strategic, price setting firms and an infinite set of fully rational, privately informed consumers who enter the market sequentially. I show that there exists a sequential equilibrium in which prices converge to their realized product qualities, hence perfectly aggregating the privately held information. This fully revealing equilibrium is shown to be welfare inferior to a fixed price equilibrium in which perfect information aggregation might fail. Therefore, one has to be careful not to equate fully revealing prices with welfare optimality.