MAREK WERETKA: RESEARCH AGENDA
 


 

    1) A THEORY OF BILATERAL OLIGOPOLY (THIN MARKETS):

In this sequence of papers me and my coauthors develop a framework to study markets in which all traders, buyers and sellers are large, in the sense that they all have market power (bilateral oligopoly or thin markets). Neither the existing IO models, such as Cournot, nor their generalizations can be used to model such markets. Unlike the standard IO models our framework does not a priori assume that some of the traders do or do not have market power because "they are large or small". Here, market power arises endogenously for each trader as a result of market clearing and optimization by all agents. Our framework allows for multiple goods and heterogeneous traders.

·         "Thin Markets," The New Palgrave Dictionary of Economics Online (2008), Steven N. Durlauf and Lawrence E. Blume, Eds. Palgrave Macmillan.  (with M. Rostek), link,

 

  •   "Endogenous Market Power" November 2005, pdf  (RR JET)  

    We present a framework to study thin markets. We define equilibrium and show that such equilibrium exists in economies with smooth utility and cost functions, is generically locally unique and is Pareto inefficient. The framework suggests that trader’s market power depends positively on the convexity of preferences and cost functions of the trading partners. In addition, market power of different traders reinforces each other. We also characterize an equilibrium outcome:  compared to the competitive model, the volume of trade is reduced and price bias can be positive or negative depending on the third derivatives. Original, longer version available upon request via e-mail.

  • "Slope Takers in Anonymous Markets" pdf

    We provide a game theoretic foundation for the equilibrium concept proposed in paper "Endogenous Market Power". We show that that the concept of equilibrium can be viewed as a refinement of a Nash equilibrium in a game defined by the Walrasian auction. We also argue that the equilibrium will be selected in anonymous markets in which investors have no other information but their past trades and market prices. Therefore, they independently discover their market power through statistical inference, for example by estimating their demands using the Least Squares method. Hence, we endow the model with the “learning story” of how anonymous markets converge to an equilibrium outcome. (Available upon request via e-mail)

  • "Dynamic Bilateral Oligopoly" (with M. Rostek),   

This paper develops a dynamic model of thin markets, in which the market structure is one of bilateral oligopoly. The paper demonstrates that market thinness qualitatively changes equilibrium properties of prices and dynamic trading strategies,

 2) THIN FINANCIAL MARKETS:

    In this sequence of papers, we study thin financial markets — markets with a small number of institutional investors (such us dealers, mutual of pension funds) constantly monitoring the price and providing liquidity. It is now well documented that such investors have significant price impact and they mitigate its adverse effects when choosing their trading strategies. The competitive equilibrium asset-pricing models, such as CAPM or consumption CAPM which assume price-taking, are thus not suitable to model markets with such large investors. By contrast to the existing literature on thin markets, the price impact does not arise due to asymmetric information or exogenous costs (transaction, search or financing). but  is derived from the market primitives: number of traders, return variability and risk attitudes.

  •   "Dynamic Thin Markets" (with M. Rostek),   pdf

In this paper we apply the model of dynamic bilateral oligopoly to asset pricing model. The predictions of our model match a number of empirical facts that are hard to reconcile with the competitive or Cournot-based models, e.g., optimal execution of trade through breaking-up orders into blocks, asset price overshooting, stylized facts about price volatility. The proposed approach yields an analytical framework that can be used to study dynamic markets with bilateral market power.  (former title: Frequent trading and Price Impact In Thin Markets)

    Extensive empirical evidence shows that assets are priced not only for their risk and return but also liquidity. We model asset illiquidity as a price concession required to liquidate a block of assets. Extending the model from the previous paper to stochastic environments, we show that uncertainty about asset return gives rise to equilibrium liquidity premia. To our knowledge, we are the first to derive equilibrium for non-competitive markets with multiple assets (without appealing to costs or asymmetric information). Apart from characterizing equilibrium portfolios and prices, this allows us to ask new questions about behavior of aggregate market liquidity and cross-market liquidity effects. We study implications for optimal trading strategies and asset valuation.

    We demonstrate that in thin markets the state prices exist and hence assets can be priced using a pricing kernel Consequently the Modigiliani-Miller theorem holds. We also study biases in asset returns due to thin trading with traders that have non-quadratic utility functions. In particular, we show that with CRRA functions, the model predicts asset returns that are consistent with the equity premium and the riskless rate puzzles.   (Available upon request via e-mail)

     3) DIVISIBLE GOOD AUCTIONS:

In this sequence of papers, we study thin auctions of perfectly divisible goods. We show that such auctions share many properties of thin markets. Many thanks to Marzena for noticing the link between the theory of bilateral oligopoly and the literature on divisible good and double auctions.

We study the design of two common auction formats for divisible goods: uniform-price and discriminatory auction. Allowing for an arbitrary number of bidders, private and common values, and asymmetries in endowments and marginal valuations, we characterize linear equilibria and analytically derive the optimal bidding strategies for both auction formats. We compare revenues and efficiency of two auctions.

 4) OTHER RESEARCH

     

 

   

Home                             Vita