Marzena Rostek

Competition in Financial Innovation

This paper examines the incentives to innovate securities provided by frictionless competitive markets (with short sales) to entrepreneurs. In economies with symmetric investor utilities, we provide the conditions under which a …rm’s market value is maximized by a complete …nancial structure –that is, when the mechanism that gives rise to market incompleteness is the one illustrated in the classical example of Allen and Gale (1991). The foundation for incompleteness in that case is derived from innovation costs and free riding among entrepreneurs. For the class of preferences where an incomplete …nancial structure maximizes the …rms’market values, markets are incomplete with a probability of one, even when innovation is cost free. In this sense, we provide an alternative to Allen and Gale’s foundation for market incompleteness.

Price discrimination and resale: A classroom experiment

The authors present a classroom experiment designed to illustrate key concepts of third-degree price discrimination. By participating as buyers and sellers, students actively learn (1) how group pricing differs from uniform pricing, (2) how resale between buyers limits a sellers ability to price discriminate, and (3) how preventing price discrimination might reduce welfare. The exercise challenges sellers to set optimal prices against unknown demand curves by using a concrete story of pharmaceutical pricing to American and Mexican consumers. By working through profit calculations, students arrive at the optimal seller prices in three different settings: uniform pricing, price discrimination to two groups, and price discrimination to two groups who can resell to each other. The experimental design encourages students to converge reliably to the theoretical predictions. Classroom discussion can focus on real-world examples of price discrimination and on regulatory policy questions in industrial organization and international trade.

Privacy in Markets

Privacy is a common concern in markets. We study dynamic markets based on the uniform-price double auction with I heterogeneous traders who have private information. Traders’ demand schedules can condition on the statistics of past and current outcomes. Equilibrium strategies depend on the entire history. Limited transparency is generally necessary for equilibrium existence. With sufficiently many trading rounds, more transparent designs increase efficiency. For any information structure, one can design a privacy-preserving auction that is ex post efficient. The model allows analysis of how transparency and, more generally, the design of conditioning statistics affects equilibrium trading behavior and efficiency.