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This paper investigates the effects of market size on the ability of price to aggregate traders' private information. To account for heterogeneity in correlation of trader values, a Gaussian model of double auction is introduced that departs from the standard information structure based on a common (fundamental) shock. The paper shows that markets are(More)
In this paper we develop a framework to study thin markets, in which all traders, buyers, and sellers are large, in the sense that they all have market power (also known as bilateral oligopoly). Unlike many IO models, our framework does not assume a priori that some traders have or do not have market power because " they are large or small. " Here, market(More)
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Extensive empirical research has shown that in many markets institutional investors have a significant impact on prices and mitigate its adverse effects through their trading strategies. This paper develops a dynamic model of such thin markets, in which the market structure is one of bilateral oligopoly. The paper demonstrates that market thinness(More)
This paper examines the optimal bundling strategies of a multiproduct monopoly in markets in which a seller cannot monitor and thereby restrict the purchases of buyers to a single bundle, while buyers have resale opportunities. In such markets, the standard mechanism through which bundling increases seller profits, based on price discrimination, is not(More)
Does encouraging trader participation enhance market competitiveness? This paper shows that, when trader preferences are interdependent, trader market power does not necessarily decrease with greater participation , and traders need not become price takers in large markets. Thus, larger markets can be less liquid and associated with lower ex ante welfare.(More)
Large institutional investors dominate many financial markets. This paper develops a consumption-based model of markets in which all institutional traders recognize their impact on prices. Bilateral (buyer and seller) market power changes efficiency and arbitrage properties of equilibrium. Predictions match temporary and permanent price effects of supply(More)
Financial markets crucially rely on the development of an infrastructure dedicated to the enforcement of contracts. Here we study the effects of limited enforcement capacity on financial contracting by proposing a new theory of costly state verification. In our model the principal contracts with a population of entrepreneurs, who borrow to finance risky(More)
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