COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1736 Strategic Supply Function Competition with Private Information Xavier Vives October 2009 A finite number of sellers (n) compete in schedules to supply an elastic
demand. The costs of the sellers have uncertain common and private value components and
there is no exogenous noise in the system. A Bayesian supply function equilibrium is
characterized; the equilibrium is privately revealing and the incentives to acquire
information are preserved. Price-cost margins and bid shading are affected by the
parameters of the information structure: supply functions are steeper with more noise in
the private signals or more correlation among the costs parameters. In fact, for large
values of noise or correlation supply functions are downward sloping, margins are larger
than the Cournot ones, and as we approach the common value case they tend to the collusive
level. Private information coupled with strategic behavior induces additional
distortionary market power above full information levels and welfare losses which can be
counteracted by subsidies. As the market grows large the equilibrium becomes price-taking,
bid shading is of the order of 1/n, and the order of magnitude of welfare losses
is I/n2. The results extend to demand schedule competition
and a range of applications in product and financial markets are presented. |
