Market Transparency, Competitive Pressure and Price Volatility

CEPR Discussion Paper Series No. 1472

Posted: 12 Mar 1997

See all articles by Kai-Uwe Kuhn

Kai-Uwe Kuhn

University of East Anglia (UEA) - Centre for Competition Policy; Centre for Economic Policy Research (CEPR)

Catalina B. Martinez

Universitat Autonoma de Barcelona

Date Written: September 1996

Abstract

In this paper we analyze the role of asymmetric information between firms and consumers about market conditions. In standard models of oligopoly informational advantages of firms over customers do not play a role because all prices are observable. When customers are unable to observe all relevant prices in the market, however, they will attempt to infer the level of unobserved prices from those they can observe. This generates an incentive to use price policies to signal the price realizations of rivals. We show that even with arbitrarily low levels of uncertainty about marginal costs of production, equilibrium prices and price variability are strictly higher in a market with private information about costs. We show how firms can exploit this effect to relax competition through information exchange and analyze the role of advertising in such markets.

JEL Classification: D43, D82, D83, L1, L41

Suggested Citation

Kuhn, Kai-Uwe and Martinez, Catalina B., Market Transparency, Competitive Pressure and Price Volatility (September 1996). CEPR Discussion Paper Series No. 1472, Available at SSRN: https://ssrn.com/abstract=4727

Kai-Uwe Kuhn (Contact Author)

University of East Anglia (UEA) - Centre for Competition Policy ( email )

UEA
Norwich Research Park
Norwich, Norfolk NR47TJ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Catalina B. Martinez

Universitat Autonoma de Barcelona

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
SPAIN

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,011
PlumX Metrics