Firms In Markets Under Uncertainty
Name
SSRN-id1446777.pdf
Size
292.33 KB
Format
Adobe PDF
Checksum (MD5)
81086b2cad5085ec3dfb40175a6044c5
Author(s)
Gibbons, Robert
Holden, Richard T.
Powell, Michael
Date Issued
July 2009
Publisher
Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology
Series/Report no.
MIT Sloan School of Management Working Paper;4744-09
Abstract
We analyze a rational-expectations model of price formation in an intermediate-good market under uncertainty. There is a continuum of dyads, each consisting of an upstream party and a downstream party. Both parties can make specific investments at private cost. As in property-rights models, different governance structures induce different investments. As in rational-expectations models, some parties may invest in acquiring (common-value) information, which is then incorporated into the market-clearing price by the parties' trading behaviors. The informativeness of the price mechanism affects the returns to specific investments and hence the optimal governance structure for individual dyads; meanwhile, the governance-structure choices by individual dyads affect the informativeness of the price mechanism. In equilibrium, firms and the market coexist and shape each other. In particular, the informativeness of the price mechanism can induce ex ante homogeneous dyads to choose heterogeneous governance structures.
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