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Price Competition between Market Makers

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Author Info
Dennert, Jurgen
Abstract

This paper explicitly models price competition in financial markets in which prices are quoted by competing dealers before future demand is observed. The strategic behavior of informed insiders and uninformed liquidity traders implies that a growing number of marketmakers leads to a higher risk exposure for the individual marketmaker, which induces higher individual bid-ask spreads and higher transaction costs for the liquidity traders. Under certain conditions, liquidity traders would prefer a monopolistic marketmaker rather than several competing marketmakers. The results hold under various assumptions on the strategy space of the marketmakers. Copyright 1993 by The Review of Economic Studies Limited.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 60 (1993)
Issue (Month): 3 (July)
Pages: 735-51
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Handle: RePEc:bla:restud:v:60:y:1993:i:3:p:735-51

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  1. Peter C. Reiss & Ingrid M. Werner, 1994. "Transaction Costs in Dealer Markets: Evidence From The London Stock Exchange," NBER Working Papers 4727, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. FOUCAULT, Thierry & RÖELL, Ailsa & SANDAS, Patrik, 2000. "Market Making with Costly Monitoring : An Analysis of the SOES Controversy," Les Cahiers de Recherche 702, HEC Paris. [Downloadable!]
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  3. William B. English, 2002. "Financial consolidation and monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 271-284. [Downloadable!]
  4. CALCAGNO, Riccardo & LOVO, Stefano M., 1998. "Bid-ask price competition with asymmetric information between market makers.," CORE Discussion Papers 1998016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  5. Calcagno, R. & Lovo, S.M., 2002. "Market efficiency and price formation when dealers are asymmetrically informed," Discussion Paper 42, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  6. Thomas Gehrig & Matthew Jackson, 1994. "Bid-Ask Spreads with Indirect Competition Among Specialists," Discussion Papers 1107, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
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