Endogenous market integration, manipulation and limits to arbitrage

We analyse an equilibrium model with restricted investor participation and strategic arbitrageurs. We show that an arbitrage is neither necessary nor sufficient for the existence of a strategic arbitrage. We define manipulation and show necessary and sufficient conditions to exclude manipulation. We provide a condition on local completeness under which, as entry costs tend to 0, arbitrage opportunities vanish and Cournot-Walras equilibria converge to Walrasian equilibria with restricted participation. If no market is locally complete enough, then there may be limits to arbitrage and equilibria may not converge to Walrasian equilibria with restricted participation.