Bid-Ask Price Competition with Asymmetric Information between Market-Makers

摘要

This paper studies the effect of asymmetric information on the price formation process in a quote-driven market,One market-maker receives private information on the value of the quoted asset and repeatedly competes with market-makers who are uninformed,We show that despite the fact that the informed market-maker's quotes are public,the market is never strong-form efficient with certainty until the last stage,We characterize a reputational equilibrium in which the informed market-maker influences and possibly misleads the uninformed market-makers' beliefs,At this equilibrium,a price leadership effect arises,the informed market-maker's expected pay-off is positive and the rate of price discovery increases in the last stages of trade.