Heterogeneous Beliefs and Imperfect Competition in Sequential Auction Markets

Abstract

This paper analyzes a multi-auction setting in which informed strategic agents are endowed with heterogeneous noisy signals about the liquidation value of a risky asset. We solve for the unique linear equilibrium. One result is that when the variance of the noise is small which leads to a strong correlation between signals, the competition between traders takes the form of a rat race during all the periods of trading. As we increase the level of the noise in the traders’ signals, a waiting game phase appears and the intensity of the rat race, observed only at the last auctions, decreases. When the variance of the noise is very large (implying that the correlation is weak) we only observe a waiting game. Moreover, we study the trade-off between noise and competition.

Keywords: efficiency, asymmetric information, noise, liquidity, adverse selection, competition.

JEL Classification: G14, G24, D43, D82