On Information Asymmetry as a Source of Value: Intermediation, Auctions and Information

Abstract

Why are there market makers, where a bargainer has limited information about the reservation prices of other buyers and sellers? What are the conditions such that a bargainer prefers the market maker over direct bilateral or multilateral trade, even if full information about his peers’ reservation prices may be available in direct negotiations?

Within Mr. Seemüller’s work, these questions are addressed. He analyses how bargainers determine prices on different platforms, where buyers and sellers reveal their respective offers for a good or a service to each other. A special focus lies upon the distribution of information between the bargaining parties and their inability of precise valuation. Each platform’s efficiency is analysed in detail.

Additionally, he introduces market maker’s markets, where bid and ask prices for a good or service are quoted. Despite a bid or an ask price, no more information is revealed to a seller or a buyer. Mr. Seemüller compares the efficiency of the market maker and the platform market and develops conditions when the market maker is preferred by the bargainers. When these conditions are satisfied, then a market with limited information is Pareto efficient over a market design where full information may be available.

A bargainer’s inability of precise valuation is an important ingredient to Mr. Seemüller’s work. While a buyer (or a seller) can arrive at an individual reservation price, that buyer can not determine whether that price is high or low compared to some unknown average valuation and how his reservation price compares to the other bargainers’ reservation prices. This statement is valid until the bargainers reveal their reservation prices or full information is available. Assuming a buyer with a certain valuation of a good, that buyer can only determine or estimate his valuation imprecision with some effort.