Abstract
This paper investigates the strategic foundations for rational expectations equilibrium. In the model, risk-averse traders with two signals — private information and endowment shocks — submit demand schedules to trade a risky asset. Traders are divided into groups. Within groups, traders share common signals; signals are different across different groups. Either traders become price takers or the price becomes fully revealing, but not both, as the number of competitors per group goes to infinity. As the number of groups goes to infinity, neither price taking nor fully revealing prices are obtained. Measuring competition by the quantity traded as a fraction of that traded by a price-taker, we show that optimal exercise of market power has opposite implications for competition and price informativeness.
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