Reference

Andrea Attar, Thomas Mariotti, and François Salanié, On Competitive Nonlinear Pricing, Theoretical Economics, 2018, forthcoming.

Abstract

We study a discriminatory limit-order book in which market makers compete in nonlinear tariffs to serve a privately informed insider. Our model allows for general nonparametric specifications of preferences and arbitrary discrete distributions for the insider's private information. Adverse selection severely restricts equilibrium outcomes: in any pure-strategy equilibrium with convex tariffs, pricing must be linear and at most one type can trade, leading to an extreme form of market breakdown. As a result, such equilibria only exist under exceptional circumstances that we fully characterize. These results are strikingly different from those of existing analyses that postulate a continuum of types. The two approaches can be reconciled when we consider "- equilibria of games with a large number of market makers or a large number of types.

Keywords

Adverse Selection; Competing Mechanisms; Limit-Order Book;

JEL codes

  • D43: Oligopoly and Other Forms of Market Imperfection
  • D82: Asymmetric and Private Information • Mechanism Design
  • D86: Economics of Contract: Theory

Research partnership

Regulation, Liquidity and Solvency Risks

Replaces

Andrea Attar, Thomas Mariotti, and François Salanié, On Competitive Nonlinear Pricing, September 2015.