The results presented in the last chapter were derived in a very general setting without specifying particular utility functions or return distributions. One needs to describe the economy in more detail in order to go beyond these general results. The loss of generality is compensated for by the finding of closed-form solutions, comparative static results, and a more detailed analysis of the economic linkages. Models in the current chapter take a closer look at the market microstructure and its role in the revelation of information. This chapter is devoted to classifying static models where each trader trades only once and thus does not have to worry about the impact of his trading on the future price path. Dynamic models are discussed in Chapter 4 .
Market microstructure models can be classified along at least four dimensions: type of orders, sequence of moves, price setting rule, and competitive versus strategic structure. These alternative classification schemes are described below.
Traders submit different types of orders depending on the market structure. The three basic types of orders are market orders, limit orders, and stop (loss) orders. A trader who submits a market order can be sure that his order will be executed, but bears the risk that the execution price might fluctuate a lot. Limit orders allow one to reduce this risk since a buy (sell) order is only executed if the transaction price is below (above) a certain limit. Stop orders set the opposite limits. They trigger a sell (buy) transaction if the price drops below (rises above) a prespecified level. However, the trader faces an execution risk with limit and stop orders since these orders will not be filled if the equilibrium price does not reach the specified limit. The trader can form a whole demand schedule by combining many limit and stop orders. Demand schedules specify the number of stocks that a trader wants to buy or sell for each possible equilibrium price. Therefore, the trader can avoid