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The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)

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Author Info
Economides, Nicholas
Siow, Aloysius

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Abstract

Liquidity considerations will limit the number of markets in a competitive economy. Welfare implications are ambigious. Since liquidity is a positive externality, there may be too little liquidity per market at a noncooperative equilibrium and too many markets compared to the surplus-maximizing market structure. But liquidity is also self-reinforcing. Given an existing equilibrium, new markets may not open because nobody wants to use a new market with low liquidity. There may be too few markets to achieve efficiency. A nondiscriminating monopolist will operate smaller and more numerous markets compared to optimality as well as to the equilibrium of independent auctioneers. Copyright 1988 by American Economic Association.

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Publisher Info
Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 78 (1988)
Issue (Month): 1 (March)
Pages: 108-21
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Handle: RePEc:aea:aecrev:v:78:y:1988:i:1:p:108-21

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