AGGREGATION OF INFORMATION IN LARGE

Consider a homogeneous product market where firms have private information about an uncertain demand parameter and compete in quantities. We examine the convergence properties of Bayesian-Cournot equilibria as the economy is replicated and conclude that large Cournot (or almost competitive) markets do not aggregate information efficiently except possibly when the production technology exhibits constant returns to scale. Even in a competitive market there is a welfare loss with respect to the first best outcome due to incomplete information in general. Nevertheless a competitive market is efficient, taking as given the decentralized private information structure of the economy. Endogenous (and costly) information acquisition is examined and seen to imply that the market outcome always falls short of the first best level with decreasing returns to scale. The results are also shown to be robust to the addition of extra rounds of competition which allows firms to use the information revealed by past prices. Explicit closed form solutions yielding comparative static results are obtained for models characterized by quadratic payoffs and affine information structures.

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