Strategic Supply Function Competition with Private Information

Abstract: A Bayesian supply function equilibrium is characterized in a market where firms have private information about their uncertain costs. It is found that with supply function competition, and in contrast to Bayesian Cournot competition, competitiveness is 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. Furthermore, competition in supply functions aggregates the dispersed information of firms (the equilibrium is privately revealing) while Cournot competition does not. The implication is that with the former the only source of deadweight loss is market power while with the latter we have to add private information. As the market grows large the equilibrium becomes competitive and we obtain an approximation to how many competitors are needed to have a certain degree of competitiveness.

The paper is related to the theme of the recent book by Professor Vives "Information and Learning in Markets" (Princeton University Press, 2008) check it at http://webprofesores.iese.edu/xvives

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Biography: Xavier Vives is Professor of Economics and Finance and academic director of the Public-Private Research Center at IESE Business School, and Professor at Universitat Pompeu Fabra. He holds a Ph.D. in Economics from UC Berkeley.

He is a member of the Economic Advisory Group on Competition Policy at the European Commission; of the European Economic Advisory Group at CESifo; Vicepresident of the Spanish chapter of the International Association for Energy Economics, and President of the Spanish Economic Association for 2008. Research Fellow of the Center for Economic Policy Research, where he served as Director of the Industrial Organization Program in 1991-1997. He is also a member of the European Academy of Sciences and Arts, Fellow of the Econometric Society since 1992 and member of its Council since 2006, Fellow of the European Economic Association since 2004 and member of its Executive Committee since 1998.

From 2001 to 2005 he was Professor of Economics and Finance and The Portuguese Council Chaired Professor of European Studies at INSEAD, Research Professor at ICREA-UPF, 2003-2006, and from 1991 to 2001, Director of the Institut d'Anàlisi Econòmica, CSIC. He has taught at Harvard University, Universitat Autònoma de Barcelona, Universitat Pompeu Fabra, the University of California at Berkeley, the University of Pennsylvania, and New York University (King Juan Carlos I Chair).

His fields of interest are industrial organization and regulation, the economics of information, and banking and financial economics. He has published in the main international journals and is the author of Information and Learning in Markets: the Impact of Market Microstructure (Princeton University Press, 2008), Oligopoly Pricing: Old Ideas and New Tools (MIT Press, 1999), editor of Corporate Governance: Theoretical and Empirical Perspectives (CUP, 2000), and co-editor of Capital Markets and Financial Intermediation (CUP, 1993). He has been editor of main international academic journals and currently he is the Editor of the Journal of the European Economic Association, and Co-editor of the Journal of Economics and Management Strategy.

His current research interests include dynamic rivalry, innovation and competition, banking crisis and regulation, information and financial markets, competition policy, and the location of headquarters.
He has received several research awards: King Juan Carlos I Prize in 1988; the Catalan Society for Economics Prize in 1996; the Narcís Monturiol Medal in 2002, and the Catalonia Economics Prize in 2005.

Dr. Vives has been a consultant on competition, regulation, and corporate governance issues for the World Bank, the Inter-American Development Bank, the European Commission as well as for major international corporations.


Xavier Vives