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Market Microstructure and Intermediation

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  • Daniel F. Spulber

Abstract

This paper emphasizes the important role played by intermediaries in the economy, including wholesalers, retailers, and financial firms. The paper defines an intermediary as an economic agent that purchases from suppliers for resale to buyers or that helps buyers and sellers meet and transact. Intermediaries coordinate transactions and provide the institutions of exchange that constitute market microstructure. Intermediaries set prices, manage inventories, coordinate exchange, and provide information through guarantees and delegated monitoring. These crucial activities help to explain how markets attain equilibrium prices and quantities. The paper suggests that the study of intermediation should be incorporated into mainstream economic analysis.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.10.3.135
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 10 (1996)
Issue (Month): 3 (Summer)
Pages: 135-152

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Handle: RePEc:aea:jecper:v:10:y:1996:i:3:p:135-52

Note: DOI: 10.1257/jep.10.3.135
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  1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  2. Logue, Dennis E, 1975. "Market-Making and the Assessment of Market Efficiency," Journal of Finance, American Finance Association, vol. 30(1), pages 115-23, March.
  3. Yuk-Shee Chan., 1982. "On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Research Program in Finance Working Papers 127, University of California at Berkeley.
  4. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Spulber, Daniel F., 1985. "Risk sharing and inventories," Journal of Economic Behavior & Organization, Elsevier, vol. 6(1), pages 55-68, March.
  6. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
  7. Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, December.
  8. Benston, George J. & Hagerman, Robert L., 1974. "Determinants of bid-asked spreads in the over-the-counter market," Journal of Financial Economics, Elsevier, vol. 1(4), pages 353-364, December.
  9. Thomas Ho & Hans Stoll, . "On Dealer Markets Under Competition," Rodney L. White Center for Financial Research Working Papers 01-80, Wharton School Rodney L. White Center for Financial Research.
  10. Carlton, Dennis W, 1991. "The Theory of Allocation and Its Implications for Marketing and Industrial Structure: Why Rationing Is Efficient," Journal of Law and Economics, University of Chicago Press, vol. 34(2), pages 231-62, October.
  11. Cohen, Kalman J, et al, 1981. "Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 287-305, April.
  12. Dennis W. Carlton, 1986. "The Rigidity of Prices," NBER Working Papers 1813, National Bureau of Economic Research, Inc.
  13. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
  14. Stephen D. Williamson, 1984. "Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing," Working Papers 583, Queen's University, Department of Economics.
  15. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  16. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
  17. Chin Lim, 1981. "Risk Pooling and Intermediate Trading Agents," Canadian Journal of Economics, Canadian Economics Association, vol. 14(2), pages 261-75, May.
  18. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
  19. Williamson, Stephen D, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 135-45, February.
  20. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
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