Competition between market-making Intermediaries
AbstractWe introduce capacity constrained competition between market-making intermediaries in a model in which agents can choose between trading with intermediaries, joining a search market or remaining inactive. Recently, market-making by a monopolistic intermediary has been analyzed by Rust and Hall (2003) and Gehrig (1993). Market-makers set publicly observable ask and bid prices. Because market-making involves price setting, without further restrictions competition between market-making intermediaries is Bertrand-like and yields the Walrasian outcome, where the ask-bid spread is zero (Rust and Hall 2003, Gehrig 1993). However, positive ask-bid spreads and competition between market-makers can be observed in reality, e.g. in banking and in retailing. Following Kreps and Scheinkman (1983) and Boccard and Wauthy (2000), we therefore introduce physical capacity constraints. This allows for a gradual transition from monopolistic to perfectly competitive intermediation as the number of intermediaries increases. In particular, we show that given Cournot capacities, intermediaries will set Cournot bid and ask prices in the subsequent subgames, so that the equilibrium of the intermediated market coincides with the Walrasian equilibrium as the number of intermediaries becomes large
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 515.
Date of creation: 11 Aug 2004
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Market-making; capacity constrained competition; market microstructure;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 559-80, October.
- repec:rus:hseeco:72158 is not listed on IDEAS
- Stahl, Dale O, II, 1988. "Bertrand Competition for Inputs and Walrasian Outcomes," American Economic Review, American Economic Association, vol. 78(1), pages 189-201, March.
- John Rust & George Hall, 2002.
"Middlemen versus Market Makers: A Theory of Competitive Exchange,"
NBER Working Papers
8883, National Bureau of Economic Research, Inc.
- John Rust & George Hall, 2003. "Middlemen versus Market Makers: A Theory of Competitive Exchange," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 353-403, April.
- John Rust & George Hall, 2001. "Middle Men Versus Market Makers: A Theory of Competitive Exchange," Cowles Foundation Discussion Papers 1299, Cowles Foundation for Research in Economics, Yale University.
- Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.