Market Microstructure and Informational Efficiency

The competitive market is informationally efficient; people only need to know prices to implement a competitive outcome. However, the standard formulation of competition neglects any underlying market microstructure; prices—which provide all necessary information—are exogenous. This paper studies the informational efficiency of two market microstructures: search versus market-makers. First, we prove that a large search economy requires an infinitely larger message space compared to the competitive equilibrium. Then, we prove that an economy with market-makers only needs one more dimension than the competitive process, making it is second-best in terms of information but with an explicit model of decentralized price-formation