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Information provision in over-the-counter markets

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Author Info

  • Dang, Tri Vi
  • Felgenhauer, Mike

Abstract

This paper analyzes endogenous information provision and purchase in over-the-counter (OTC) markets. On the supply side the optimal strategy of an information provider consists of selling identical information to all OTC traders. On the demand side OTC traders have an incentive to buy information from the same provider. If the incumbent information provider charges not too high a price, then an entrant firm has no demand even though it offers less expensive information of the same quality. This paper provides a rationale for the high level of market power in the industry for financial market data and credit rating services as well as why institutional traders may have no demand for a finer rating system. In addition, this paper shows that it is welfare improving for the security issuer to pay for rating services rather than having OTC traders purchase costly rating reports.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 21 (2012)
Issue (Month): 1 ()
Pages: 79-96

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Handle: RePEc:eee:jfinin:v:21:y:2012:i:1:p:79-96

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Web page: http://www.elsevier.com/locate/inca/622875

Related research

Keywords: Information provision; Information acquisition; Over-the-counter trading; Rating services;

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References

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  1. Levin, Jonathan, 2001. "Information and the Market for Lemons," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 657-66, Winter.
  2. Admati, Anat R & Pfleiderer, Paul, 1990. "Direct and Indirect Sale of Information," Econometrica, Econometric Society, vol. 58(4), pages 901-28, July.
  3. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  4. Laura Veldkamp, 2003. "Media Frenzies in Markets for Financial Information," Working Papers 03-20, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
  6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  7. Caillaud, Bernard & Jullien, Bruno, 2003. " Chicken & Egg: Competition among Intermediation Service Providers," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 309-28, Summer.
  8. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  9. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004. "Over-the-Counter Markets," NBER Working Papers 10816, National Bureau of Economic Research, Inc.
  10. Admati, Anat R & Pfleiderer, Paul, 1988. "Selling and Trading on Information in Financial Markets," American Economic Review, American Economic Association, vol. 78(2), pages 96-103, May.
  11. Economides, Nicholas & Siow, Aloysius, 1988. "The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)," American Economic Review, American Economic Association, vol. 78(1), pages 108-21, March.
  12. Alessandro Lizzeri, 1999. "Information Revelation and Certification Intermediaries," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 214-231, Summer.
  13. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 317-55, July.
  14. Anke Kessler, 1998. "The Value of Ignorance," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 339-354, Summer.
  15. Admati, Anat R. & Pfleiderer, Paul, 1986. "A monopolistic market for information," Journal of Economic Theory, Elsevier, vol. 39(2), pages 400-438, August.
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