Essays on Market Microstructure

In this doctoral dissertation, I study markets in which the private information held by various agents may be reflected in prices, and as a result may be leaked to other market participants. Specifically, I study how the market microstructure interacts with the price discovery process, the market efficiency, agents' market power, and social welfare. This dissertation consists of two chapters. The first chapter studies the implications of leakage of information through prices for the efficient operation of markets with heterogeneous agents. Focusing on uniform-price double auctions, I first characterize how the presence of heterogeneity (e.g., in terms of agents’ trading costs, information precision, or risk attitudes) can shape the information content of prices and hence the market’s informational efficiency. I find that price informativeness decreases with the extent of heterogeneity in the market. I then establish that such reductions in price informativeness can in turn manifest themselves as an informational externality: in the presence of heterogeneity, agents do not internalize the impact of their trading decisions on the information revealed to others via prices. This chapter also shows that the welfare implications of this heterogeneity-induced informational externality depends on the intricate details of the market. The results thus indicate that accounting for the possibility of information leakage should be an important consideration in designing markets with asymmetric information. I conclude by exploring the welfare implications of market segmentation in the presence of heterogeneous agents and information leakage. The second chapter studies how information asymmetry shapes price impact in the presence of strategic interactions, i.e., agents' actions being strategic substitutes or strategic complements. Focusing on demand-function competition with strategic interactions, I first establish the existence and characterize the equilibrium. The characteriza