Valuing Asymmetric Information Under Differing Market Conditions

Abstract

This paper will try to model the value of asymmetric information inmarkets using a game I call the Oil Game. In other words it will look athow different market conditions can change the advantage one would gainfrom better information. Specifically I would like to identify certain marketconditions and types of transactions that optimize the advantage gainedby asymmetric information. There are many instances in finance in whichinvestors or players in certain games have different sets of information goinginto decisions that are made in a single market or transaction. Yet, there isvery little work done to try and analyze or quantify the advantage gainedfrom having superior information.I will use a basic model of the world in which there is only one asset andtwo players. The two players will be countries and will participate in the oilgame. At each time step they will decide to purchase a certain amount ofthe asset to meet future demands with the goal of minimizing cost per unitdemand. One of the countries in the game will have incomplete informationas to what the demand for the asset will be in the next period whereas theother country will have no information on what is going to happen betweenperiods. Both countries will have access to how demand for the asset haschanged through time. Each of the countries will be trying to minimize thecost per unit demand of oil