Competing mechanisms in a common value environment

Consider strategic risk-neutral traders competing in schedules to supply li quidity to a risk-averse agent who is privately informed about the value of the asset and his hedging needs. Imperfect competition in this common valu e environment is analyzed as a multi-principal game in which liquidity supp liers offer trading mechanisms in a decentralized way. Each liquidity suppl ier behaves as a monopolist facing a residual demand curve resulting from t he maximizing behavior of the informed agent and the trading mechanisms off ered by his competitors. There exists a unique equilibrium in convex schedu les. It is symmetric and differentiable and exhibits typical features of ma rket-power: Equilibrium trading volume is lower than ex ante efficiency wou ld require. Liquidity suppliers charge positive mark-ups and make positive expected profits, but these profits decrease with the number of competitors . In the limit, as this number goes to infinity, ask (resp. bid) prices con verge towards the upper (resp. lower) tail expectations obtained in Glosten (1994) and expected profits are zero.