Premium
Price Inference in Small Markets
Author(s) -
Rostek Marzena,
Weretka Marek
Publication year - 2012
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta9573
Subject(s) - economics , econometrics , monotonic function , statistic , aggregate (composite) , common value auction , shock (circulatory) , value (mathematics) , private information retrieval , inference , microeconomics , mathematics , statistics , computer science , medicine , mathematical analysis , materials science , composite material , artificial intelligence
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 informationally efficient only if correlations of values coincide across all bidder pairs. As a result, with heterogeneously interdependent values, price informativeness may not increase monotonically with market size. As a necessary and sufficient condition for the monotonicity, price informativeness increases with the number of traders if the implied reduction in (the absolute value of) an average correlation statistic of an information structure is sufficiently small.