Integration and Information: Markets and Hierarchies Revisited [report]

Robert Gibbons, Richard Holden, Michael Powell
2010 unpublished
We analyze a rational-expectations model of price formation in an intermediategood market under uncertainty. There is a continuum of dyads, each consisting of an upstream party and a downstream party. Both parties can make speci...c investments at private cost, and there is a machine that either party can own. As in propertyrights models, di¤erent ownership structures create di¤erent incentives for the parties' investments. As in rational-expectations models, some parties may invest in
more » ... invest in acquiring information, which is then incorporated into the market-clearing price by the parties' trading behaviors. The informativeness of the price mechanism a¤ects the returns to speci...c investments and hence the optimal ownership structure for individual dyads; meanwhile, the ownership choices by individual dyads a¤ect the informativeness of the price mechanism. In equilibrium the informativeness of the price mechanism can induce ex ante homogenous dyads to choose heterogeneous ownership structures. (JEL D20, D23)
doi:10.3386/w15779 fatcat:f4e5o23u6nbodfomi7gpqtnk5e