Market Power and Market Design
Paper Session
Tuesday, Jan. 5, 2021 12:15 PM - 2:15 PM (EST)
- Chair: Scott Duke Kominers, Harvard University
The Equilibrium Existence Duality: Equilibrium with Indivisibilities and Income Effects
Abstract
We show that, with indivisible goods, the existence of competitive equilibrium fundamentally depends on agents’ substitution effects, not their income effects. Our Equilibrium Existence Duality allows us to transport results on the existence of equilibrium from transferable-utility economies to settings with income effects. One consequence is that net substitutability-which is a strictly weaker condition than gross substitutability-is sufficient for the existence of equilibrium. We also extend the “demand types” classification of valuations (Baldwin and Klemperer, 2019), and state a “Unimodularity Theorem with Income Effects” that gives conditions on the patterns of substitution effects that guarantee the existence of competitive equilibrium.Exchange Competition, Entry, and Welfare
Abstract
We assess the consequences for market quality and welfare of different entry regimes and exchange pricing policies, integrating a microstructure model with a free-entry, exchange competition model where exchanges have market power in technological services. Free-entry delivers superior liquidity and welfare outcomes vis-`a-vis an unregulated monopoly, but entry can be excessive or insufficient. Depending on the extent of the monopolist's technological services undersupply compared to the first best, a planner can achieve a higher welfare controlling entry or platform fees.Primary Dealers and the Demand for Government Debt
Abstract
Leveraging the fact that in many primary debt issuance markets securities of varying maturities are sold simultaneously, we recover participants' full demand systems by generalizing methods for estimating individual demands from bidding data. The estimated preference parameters allow us to partition primary dealers into two main classes. For the first class, which largely coincides with the largest money market players, we find significant complementarities in their demand for Treasury bills in primary markets, while for the second class, the patterns in their willingness to pay are mixed and time-varying. We present a dealer-client model that captures the interplay between the primary and secondary market to provide a rationale for our findings. We argue that the complementarity likely arises from the large dealers "making markets", and hence requiring to hold inventory of all securities. Our results are useful both for minimizing the cost of financing of government debt and for optimally implementing financial regulation that is based upon partitioning financial institutions according to their downstream business strategies.Innovation in Decentralized Markets
Abstract
This paper examines innovation in imperfectly competitive markets in which assets clear separately rather than jointly. Derivatives are generally nonredundant even with zero asset supply. We characterize the scope for introducing nonredundant derivatives and examine the welfare impact of new assets. We compare the liquidity and welfare effects of the introduction of derivatives and linking trading protocols for existing assets.Discussant(s)
John Hatfield
,
McCombs School of Business
JEL Classifications
- D4 - Market Structure, Pricing, and Design