Abstract
Abstract Price-taking behavior seems to contradict rationality if a price effect is to be expected. This paper identifies a strategic effect between price-takers and non-price-takers on financial markets. It results from the liquidity reduction non-price-taking induces. Thus, a trade-off between the benefits of calculating price impacts correctly and market liquidity exists. It is shown that price-takers may benefit more from trading than their fully rational counterparts do. Moreover, it is demonstrated that when the choice of behavior is unobservable and decision costs exist an investor would profit more as a non-price-taker when his trading potential is large, and more as a price-taker when it is small. However, when the choice of behavior is observable it is the other way around. If various rounds of trading take place, an investor’s terminal endowment converges to his risk tolerance share. Thus, an efficient allocation is obtained. Furthermore, a paradox concerning the endogenous choice of manners of calculation is identified.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
