Excessive Price Research Articles

Testing for multiple bubbles in the copper price: Periodically collapsing behavior

This study investigates whether multiple bubbles exist in the copper price on the basis of the Generalized Supremum Augmented Dickey-Fuller (GSADF) approach (Phillips et al., 2013). This technique delivers date-stamping strategies for the emergence as well as collapse of explosive bubble episodes and is best suited for practical application to time series. The results reveal that four explosive bubbles are detected over the period of 1980–2019 when copper price deviates from fundamental value. Besides, this finding is in accordance with the asset pricing model (Gürkaynak, 2008), which generally considers both fundamental and bubble components in the presence of asset prices. Based on the empirical results, the multiple emergence and collapse of multiple price bubbles are attributed to speculation, depreciation of the U.S. dollar, an imbalance between supply and demand, and financial crises. Policymakers should actively recognize bubble episodes and monitor their evolution, which could be conducive to achieving the effective stabilization of the international copper price. To reduce excess price fluctuations and explosive copper bubbles, authorities should impose restrictions on excessive speculative behaviors under extreme market conditions.

Unfair contract terms legislation as a tool for striking out excessive price clauses? Practice of the Court of Justice of the European Union and Polish courts

Zgodnie z art. 4 ust. 2 Dyrektywy Rady 93/13/EWG z dnia 5 kwietnia 1993 r. w sprawie nieuczciwych warunkow w umowach konsumenckich ocena abuzywności klauzuli umownej nie powinna dotyczyc ani określenia glownego przedmiotu umowy, ani relacji ceny i wynagrodzenia do dostarczonych w zamian towarow lub uslug, o ile warunki te zostaly wyrazone prostym i zrozumialym jezykiem. Artykul opisuje stosunek Trybunalu Sprawiedliwości Unii Europejskiej do zakazu wydawania opinii o adekwatności ceny, co poprzedzono podsumowaniem aksjologicznych fundamentow uregulowan dotyczących klauzul abuzywnych. Nastepnie dokonano analizy podejścia sądow polskich jako przykladu praktycznej transpozycji do systemu wewnetrznego panstwa czlonka Unii Europejskiej zakazu oceniania adekwatności ceny. Co istotne, wydaje sie, ze ocena skupia sie na sposobach sluzących zmianie juz ustalonej ceny, a interesy konsumentow chronione są jedynie za pośrednictwem mechanizmow o charakterze czysto prawnym, a nie ekonomicznym.

The price consequences of diversification of regional development in Poland

The economic potential of individual regions of Poland is different. Each region has its own individual specificity. Use of the specific nature of a given region is a significant element of managing the country as a whole and individual regions. Occurring imbalances in economic development may cause a lot of adverse conditions, such as internal migration or regional marginalisation. Excessive price and income disparities may consequently result in under mining the economic growth of the entire country. For reason of coherence of the whole country, it is beneficial if disproportions between given regions are not too large. This study focuses on an attempt to identify the price consequences of diversification of regional development in Poland. The analysis drew on coefficient of variation, correlation coefficient, regression coefficient and medium-term rate. It is noted that individual regions are different in terms of the dynamics of economic growth, degree of development and salary level. However, prices are much less diverse.

The Giant Awakens - Law and Economics of Excessive Pricing & COVID-19 Crisis

The COVID-19 crisis have once again elevated one of the most contentious themes in competition law and economics, namely how to deal with excessive pricing and price gouging, to the global stage. Dramatic, sudden price hikes on essential medicines and medical supplies (a practice known as price gouging, or excessive pricing) are reported in many countries affected by the crisis. The Competition Authorities have received many complaints in regards to excessive pricing / price gouging and some have already started investigations, others are closely monitoring the developments. Like a mythical giant, dormant but defiant, excessive pricing time and again captures the attention of policymakers, competition law practitioners and scholars, despite its demise being proclaimed as frequently by a certain strand of law and economics. Excessive Pricing and Price Gouging belong to the most written about, and least understood, issues in competition law and economics, with significantly conflicting views depending on the normative departing points regarding theories of harm, scope and object of competition law and legal-philosophical perspectives. Where one side of the axis elevates presumptions of supposed virtues of excessive prices, self-correcting markets and possible chilling effects on costly and risky innovation in face of vigilant enforcement, the other side of the axis point to wealth transfers as being the prima facie competition law concern, the errors in presumptions by the antagonists of enforcement and ultimately forwards the need to pursue competition law alongside fairness and social policy paradigm beyond a "purist" economic efficiency doctrine. The paper is structured as follows. Following the introductory section depicting the excessive pricing theme in general, Section two offers a critical assessment of the neoclassical and welfarist law and economics theories, informing much of the scholarly debate on excessive pricing as an anti-competitive practice. Section three presents an overview of the prohibition as well as recent, non COVID-19-related enforcement actions in European Competition Law. Section four recounts some examples of excessive pricing and price gouging during the COVID-19 pandemic in the US, UK, EU, and South Africa. Section five concludes with some law and policy reflections.

פרוצדורה ומהות בתובענות ייצוגיות בעילת מחיר מופרז: כלים שלובים להרתעה אופטימלית <br>Procedure and Substance in Excessive Pricing Class Actions: A Combined Approach for Realizing Optimal Deterrence

תקציר בעברית: המאמר מראה כיצד יש להפעיל כלים פרוצדורליים ומהותיים על מנת ליישם, במסגרת תובענה ייצוגית, את האיסור על בעל מונופולין לגבות מחיר מופרז. הוא מבקר את עמדת היועץ המשפטי לממשלה (להלן: היועץ) שהוגשה במסגרת בקשת רשות הערעור של החברה המרכזית למשקאות קלים בפרשת גפניאל בבית המשפט העליון. בפרט, המאמר מראה כי עילת המחיר המופרז אינה חריגה בהשוואה לעילות אחרות בחוק התחרות, לא מבחינת מטרותיה ולא מבחינת הדרך הראויה ליישומה, מורכבות היישום שלה, והשלכותיה. אופן היישום הראוי של העילה הוא באמצעות רובד כלכלי, המשווה בין המחיר שגבה המונופול לבין המחיר התחרותי, ורובד משפטי, שבו על בית המשפט להכריע אם הפער בין המחיר שנגבה למחיר התחרותי הוא מופרז. המאמר מראה כי אין זה ראוי להלביש מושג שסתום נוסף, הגינות, על גבי מושג השסתום של מופרזות המחיר. עוד הוא מראה כי אחת הטעויות של היועץ היא שמחד גיסא הוא מציע לאמץ את האיסור, אך מאידך גיסא הוא מאמץ את כל טענות מתנגדי האיסור, שאותן המאמר מפריך. טעות נוספת של היועץ היא שהוא מניח, ללא ביסוס, כי העלות החברתית של טעות של בית המשפט לרעת המונופול גדולה מהעלות החברתית של טעות של בית המשפט לרעת הצרכנים. במקום זאת, המאמר מציע כי בית המשפט יאזן, במקרה נתון, בין החששות משני סוגי הטעויות באמצעות חלוקת הנטלים ורף ההוכחה בשלבים השונים של ההליך, באמצעות נתח השוק, הפער מהמחיר התחרותי ומשך ההפרה. המאמר מפריך את גישת היועץ שלפיה יש להוציא קטגוריות שלמות של מקרים מגדר האיסור, ומראה שאין לגישה זו אחיזה בחוק או בפסיקה האירופית. המאמר מצביע על היחס הראוי בין עמדת רשות התחרות לבין הדין החל על אכיפה פרטית של האיסור.. English Abstract: This article explains how substance and procedure should be combined to implement, in the context of class actions, the antitrust prohibition on excessive pricing by monopolistic firms. The article demonstrates the similarity between this prohibition and other antitrust prohibitions, both with respect to their objectives and with respect to their implementation. The article criticizes the amicus curie brief submitted by the Israeli Attorney General to the Israeli Supreme Court in the appeal over the District Court’s decision to certify a class action against the supplier of Coca Cola in Israel (the Gafniel decision). Implementation of the prohibition on excessive pricing should use a two prong test: the first prong consists of economic analysis that compares the price charged by the monopolistic firm with the competitive price, and the second prong consists of legal analysis, in which the court decides whether the difference between the price charged and the competitive price is excessive. The article shows that adding an additional vague test of “unfairness” of the price, is unwarranted. The article further claims that an erroneous certification of a class action against a monopolistic firm does not necessarily create a larger social loss, compared to erroneously denying a justified certification motion. Instead, the article proposes that the court should balance, in any given lawsuit, the relevant error costs by allocating the burden of proof and setting a proper standard of proof in each of the separate stages of the class action proceedings. Such balancing can be applied by using the dominant firm’s market share, the difference between the price charged and the competitive price, and the duration of the alleged violation. The article criticizes the Advocate General’s de facto claim that a whole set of categories of cases should be exempt from the prohibition, and shows that this claim is inconsistent with the Law in Israel and in the EU. The article further elaborates on the appropriate relationship between public enforcement by the Israeli Competition Authority and the private enforcement in class actions.

The relations between sector features, pricing behavior, and the concept of social responsibility: An example of the accommodation sector

The aim of this study is to examine the relations between the cost structure of sector features and pricing behaviors through the example of the accommodation sector in terms of social responsibility. This has benefited from both the analytical geometry and the income and cost data of a real accommodation enterprise. The findings point out this situation: In the accommodation sector, the fixed costs are high, and the variable costs are low. Thus, the effects of the cost in determining the optimal price, in view of the short term, are at a very low level. There is such a very close relationship between these facts that managers of accommodation enterprises allow more limited time to the subject concerning pricing, instead of to internal matters of the company. In addition, this structure of the sector has an important role in the prevalence of an error in the public opinion that accommodation enterprises allow prohibitive (excessive) prices.

Fighting Excessive Pharmaceutical Prices: Evaluating the Options.

New treatment options for various cancer therapies appear to be extremely expensive and prices may increase further. The affordability and availability of life-saving medicines is therefore a key issue in the national health policies of all countries. International and European law grant several price-reducing options, including compulsory licensing. Still, countries are reluctant to apply for compulsory licensing and/or other regulatory options to curtail pharmaceutical prices. Why is that? Evaluating the options will support health policy decision-making on safeguarding access to affordable innovative medicines.

Low-carbon development strategy of Russia considering the impact on the economy

The article considers the impact of national climate policy on the development of the Russian economy and energy sector. Implementation of an aggressive scenario (which is aimed at containing at any cost the rise in global temperature within 1.5 °C compared to the pre-industrial era) is unacceptable to Russia from socioeconomic perspective given it leads to lowering the average annual GDP growth rate by 1.8 percentage points by 2050. Effective long-term development strategy with low GHG emissions level should focus on structural and technological modernization of the economy; improve the absorption potential of the LULUCF sector; stimulate only those structural changes in the energy sector that involve production and technological chains within the country and do not provide for excessive price growth. Russia retains a significant potential for energy efficiency growth, and the necessary condition for activating this process is sustainable economic growth as it involves modernization of the production facilities and using available and competitive industrial capacities. The implementation of a reasonable scenario, based on these principles, would allow Russia to fulfil the nationally determined contributions within the Paris Agreement while ensuring economic growth at the rate not less than the global average one.

Performance evaluation of the Bayesian and classical value at risk models with circuit breakers set up

Circuit breakers, like price limits and trading suspensions, are used to reduce price volatility in security markets. When returns hit price limits or missed, observed returns deviate from equilibrium returns. This creates a challenge for predicting stock returns and modelling value at risk (VaR). In Tehran Stock Exchange (TSE), the circuit breakers are applied to control for the excess price volatilities. This paper intend to address which models and what methodology should be applied by risk analysts to calculate the VaR when the returns are unobservable. To this end, we extend Wei's (2002) model, in the framework of Bayesian Censored and Missing-GARCH approach, to estimate VaR for a share index in TSE. Using daily data over June 2006 to June 2016, we show that the Censored and Missing- GARCH model with student-t distribution outperforms the other VaR estimation metods. Kullback-Leibler (KLIC), Kupic (1995) test and Lopez score (1998) outcomes show that estimated VaR by Censored and missing- GARCH model with student-t distribution is of the most accuracy among the other GARCH family estimated models.

Стратегия низкоуглеродного развития: перспективы для экономики России

As a party to the Paris Agreement Russia pledged not to exceed the net greenhouse gas (GHG) emissions’ level of 70–75% to that existed in 1990. Energy efficiency improvement, structural shifts in production and the increase of Russian forests’ carbon sink capacity were the key contributors to curbing the GHG emissions in Russia during the last 25 years. The decreasing carbon intensity of the GDP was a natural result of economic growth and implementation of voluntary business projects to improve the efficiency of the industrial sector using investments in modernization of the production facilities. Russia disposes significant potential to reduce GHG emissions, but the feasibility and efficiency of respective measures should be evaluated considering the implications to economic growth. Implementation of the socalled aggressive scenario to halt global temperature growth at any cost within 1.5 °C as compared to the pre-industrial era is unacceptable to Russia from socioeconomic perspective given its leading to lowering the average annual GDP growth rate by 1.8 percentage points by 2050. In addition, tough measures to reduce GHG emissions involve energy costs skyrocketing to unprecedented levels – from the current 13% of the GDP to 30% of the GDP by 2040. Such a burden would hardly be compatible with economic growth or, in any case, provide for the economic growth’s providing for improvement of the communities’ standard of living. Russia needs the long-term development strategy with low GHG emissions level focused on improving the quality of living, modernizing and increasing the competitiveness of the national economy. Such a strategy rests on the following principles: 1) Russia has been the world leader in the GHG emissions reduction since 1990, so no solid reason exists for its soonest switching to excessively stringent climate commitments which result in ungrounded additional restrictions to its socio-economic development pace; 2) The core impediment to sustainable development of Russia is not a high level of the GHG emissions, but economic stagnation. Given that the reasonable scenario of the GHG emissions reduction implies the development path that allows the national economy to grow at a rate of 3% average annual GDP as the least; 3) Action priorities in the area of the GHG sinking should involve improvement of the LULUCF sector potential by promoting sound natural resources management policy and voluntary projects to increase carbon sink and reservoir capacity of the forest and wetland ecosystems; 4) Action priorities to reduce GHG emissions assume the imperative and expediency of economic stimulating of the structural change in the energy sector that involves production and technological chains within the country and do not provide for excessive price growth. Such change includes increasing use of natural gas (as the most “clean” fossil fuel) and nuclear energy (given Russia’s leading position in the nuclear technology area), as well as cogeneration of electricity and heat. Pronounced increase in using renewables, energy storage systems and electric vehicles should be acceptable only if production of these is successfully localized and costs are reduced. Sustainable economic growth is a prerequisite for intensifying energy efficiency improvement as it involves modernization of the production facilities and using available and competitive industrial capacities. Specific measures targeted at energy savings will be inefficient given economic stagnation. A reasonable (smart) scenario of the Russia long-term economic development with the low GHG emissions level should comply with the principles above and its driving force propelled by structural and technological modernization of the economy that fully involves economic potential of the energy resource and power sector. The implementation of this development scenario would allow Russia to comply with the Paris Agreement national commitments while ensuring economic growth at the pace not yielding to that of the global average.

C-177/16 AKKA/LAA: How to Determine Excessive Prices Under Article 102 TFEU?

Case C-177/16 Autortiesību un komunicēšanās konsultāciju aģentūra / Latvijas Autoru apvienība v Konkurences padome, Judgement by the Court of Justice of the European Union of 14 September 2017 On the appropriate methods to determine whether the rates charged by a collecting society which enjoys a legal monopoly are excessive, whether such excess is ‘appreciable’ pursuant to Article 102(a) TFEU and the possible justifications for such excessive rates. Article 102 Treaty on the Functioning of the European Union (TFEU); OJ 2008 L115/47.

Expectation Anchoring and Brownian Motion in Financial Markets

I use coarse Bayesian updating to explain three stylized facts: trading anomalies around major stock market milestones, excess price volatility and trade volume, and heavy-tailed prices. When expectations are coarse and traders are heterogeneous, traders make heterogeneous expectation errors. This disagreement generates substantial trade volume and I show that the ensuing price discovery process converges in distribution to an empirically relevant class of Levy processes. Notably, I obtain this result without any exogenous shocks or processes; the only exogenous random variable is a heterogeneity parameter drawn at time zero. I then establish a perfectly non-revealing equilibrium: because traders are different, their aggregated trades generate volatile prices, yet this volatility impedes traders from learning their differences.

Unfair Pricing and Standard Essential Patents

Technical standards that are agreed within a Standard Development Organization (SDO) often cover several ‘essential’ patents for the implementation of a standard (i.e., Standard Essential Patents, SEPs). In order to allow for the standard implementation, the SEP holder commits to license its patents to any potential licensee on the basis of Fair and Reasonable and Non-Discriminatory (FRAND) conditions. In view of the recent ruling of the UK Supreme Court in Unwired Planet and the judgement of the German Bundesgerichtshof in Sisvel v. Haier, the paper assumes that the FRAND commitment implies a ‘range’ rather than a ‘single’ royalty rate. On the other hand, a royalty rate ‘beyond the outer boundary of the range’ should be considered ‘unfair’, and thus incompatible with the FRAND commitment. Besides representing a breach of the FRAND commitment, an ‘unfair’ royalty rate might also be considered an abuse of a dominant position by the SEP holder, in breach of Art. 102(a) TFEU. This paper analyses whether, and under what circumstances, Art. 102(a) TFEU can be relied upon by a competition authority in Europe to sanction a case where an ‘unfair’ royalty rate has been set by the SEP holder. To this regard, the paper provides a detailed analysis of the EU Court of Justice’s jurisprudence on Art. 102(a) TFEU. In particular, the latter jurisprudence is relied as a ‘yardstick’ to assess ‘when’ competition policy should sanction a request of unfair royalty rate by the SEP holder, ‘how’ a competition agency should assess the case and, eventually, ‘what’ remedies the competition authority might adopt. Economists have elaborated a number of ‘filters’ to define ‘when’ EU competition policy should sanction unfair pricing cases. In particular, antitrust intervention would be justified only in markets that are characterized by high and stable entry barriers, in which a firm enjoys a super-dominant position. Due to the phenomenon of over-declaration, not every SEP is indeed ‘essential’; the market power of the SEP holder thus requires a case-by-case analysis of the ‘essentiality’ of every SEP. A number of authors have also argued that excessive pricing cases should not be sanctioned in industries characterized by dynamic efficiencies. The paper argues that innovation considerations could be considered as efficiency defences in the context of antitrust investigations, rather than in excluding a priori competition policy enforcement in this field. The paper argues that a competition agency should rely on the case law of the Court of Justice of the European Union (CJEU) on Art. 102(a) TFEU to analyse a case of unfair royalty rate. In particular, United Brands cost/price test is not suitable for assessing an unfair royalty rate requested by the SEP holder, since it is de facto impossible to determine the ‘costs of production’ of individual SEPs. On the other hand, in accordance with the CJEU case law, the competition agency might rely on a number of benchmark methods with which to assess the alleged unfairness of the rate. In particular, the agency should verify its findings under multiple benchmark tests, in order to minimize the risk of false negative errors. Finally, the SEP holder could argue that the requested royalty rate is justified by its past R&D investments. In terms of remedies, the paper argues that a competition agency could require the SEP holder to license its ‘essential’ patent; such behavioral remedy is well established in the practice of the European Commission. In light of the recent Broadcom interim decision, if the competition authority was confident about its preliminary findings of unfair pricing, the agency might require the SEP holder to license its ‘essential’ patents via an interim decision; the scope, duration and exact obligations of such a duty would later be refined in the final commitment decision.

Estimating Reasonable Prices for Access to Digital Platforms’ Data:

This article reviews the competition case law and the approach of utility regulation to address excessive prices. It considers the potential challenges of applying a reasonable prices framework to access to digital platforms’ data, due to the difficulties in assessing an appropriate return on digital platforms’ investments in R&D. Following this conclusion, the article proposes to assess whether lighter forms of intervention may be sufficient to address the market failures identified and to introduce access to data if these are not likely to succeed. Keywords: reasonable prices; price regulation; digital platforms; access to data; data regulation

How Stable Are Stablecoins?

This paper analyzes the stability of stablecoins and proposes a framework to test for absolute and relative stability of stablecoins. Based on high-frequency data we find strong evidence of excess price variations. While Bitcoin is a likely source of this excess volatility because stablecoin returns, volatility and volumes are highly correlated with corresponding Bitcoin time-series, we also demonstrate through a quasi-natural experiment that stablecoins increase the trading volume of Bitcoin. The findings suggest stablecoins play a key role in cryptocurrency markets.

Performance evaluation of the Bayesian and classical value at risk models with circuit breakers set up

Circuit breakers, like price limits and trading suspensions, are used to reduce price volatility in security markets. When returns hit price limits or missed, observed returns deviate from equilibrium returns. This creates a challenge for predicting stock returns and modelling value at risk (VaR). In Tehran Stock Exchange (TSE), the circuit breakers are applied to control for the excess price volatilities. This paper intend to address which models and what methodology should be applied by risk analysts to calculate the VaR when the returns are unobservable. To this end, we extend Wei's (2002) model, in the framework of Bayesian Censored and Missing-GARCH approach, to estimate VaR for a share index in TSE. Using daily data over June 2006 to June 2016, we show that the Censored and Missing- GARCH model with student-t distribution outperforms the other VaR estimation metods. Kullback-Leibler (KLIC), Kupic (1995) test and Lopez score (1998) outcomes show that estimated VaR by Censored and missing- GARCH model with student-t distribution is of the most accuracy among the other GARCH family estimated models.

How Market Ecology Explains Market Malfunction

Standard approaches to the theory of financial markets are based on equilibrium and efficiency. Here we develop an alternative based on concepts and methods developed by biologists, in which the wealth invested in a financial strategy is like the abundance of a species. We study a toy model of a market consisting of value investors, trend followers and noise traders. We show that the average returns of strategies are strongly density dependent, i.e. they depend on the wealth invested in each strategy at any given time. In the absence of noise the market would slowly evolve toward an efficient equilibrium, but the statistical uncertainty in profitability (which is adjusted to match real markets) makes this noisy and uncertain. Even in the long term, the market spends extended periods of time away from perfect efficiency. We show how core concepts from ecology, such as the community matrix and food webs, give insight into market behavior. The wealth dynamics of the market ecology explain how market inefficiencies spontaneously occur and gives insight into the origins of excess price volatility and deviations of prices from fundamental values.

Экономические основания изменений тарификации услуг связи: цифровой бизнес в «аналоговой» регуляторной среде?

The article analyses the economic aspects of the application of antitrust legislation in the context of abuse of dominant position prohibition (primarily in the form of setting excessive prices) in industries that are characterized by a complexity of services both on the production side and on the demand side. Evidence from several recent antitrust cases against mobile network operators in Russia has shown that the analysis of prices for individual mobile services is incorrect outside the context of complex pricing under high joint fixed costs. The aim of this article is to explain the economic basis for changing the tariffs of telecommunication services in terms of antitrust legislation requirements. The article presents a direction for assessing the state of competition and the corresponding behavior of market participants (for example, attributes of determining excessive prices) taking into account the characteristics of the telecommunications industry, specially, the mobile services industry. Moreover, it is shown that mobile services exhibit the effects of active competition: a high quality of communication, high rates of innovative activity in the industry as a whole, as well as low prices.

Etik Dışı Fiyatlandırma Uygulamaları Karşısında Tüketicilerin Düşünce ve Davranışlarının İncelenmesine Yönelik Bir Araştırma (A Research on the Investigation of Consumers Thoughts and Behaviors against Unethical Pricing Practices)

Purpose – The aim of this research is to reveal the opinions of consumers towards various pricing policies that performed by companies. Accordingly, unethical pricing practices which are shelf and cash register price mismatch, excessive pricing, discounted pricing, bait and switch pricing, odd-ending pricing and price differentiation were examined. Design/methodology/approach – Qualitative and quantitative methods were used together in this research. In the qualitative context, 6 scenarios were generated to cover the relevant unethical pricing practices; the respondents' thoughts about these scenarios were tried to be obtained and coding method was used in the analysis of the obtained thoughts. In the quantitative context, a questionnaire was structured and used as a data collection tool. Additionally, some questions were utilized as well to measure the awareness of consumers about their rights in such cases. The questionnaire was performed in May 2019; 529 of 548 questionnaires were found to be suitable for analysis. Findings: According to the findings, it is seen that consumers find the pricing practices unethical, deceptive, and cause negative attitudes towards companies and decrease their loyalty. When consumers are exposed to unethical pricing practices they generally tend to react and complain, but mostly from a traditional way. At the point of complaining, consumer awareness about what legal channels are and how to use them is very low. Discussion – Consumers believe that they are deceived by unethical pricing practices performed by companies in general. Negative perceptions lead to negative attitudes towards firms, to overlook the retention of customers which are very important in today's competitive market, and to never reach potential customers.

Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency?

We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hidden liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illustrate that hidden liquidity is higher if bid–ask spreads are smaller and relative tick sizes are higher.