In markets, in which exchange requires costly search for trading partners, intermediaries can help to reduce the trading frictions. This intuition is modelled in a framework with heterogeneous agents, who have the chocie between intermediated exchange and search accompanied by some bargaining procedure. The equilibria of such a game are characterized. In the case of a monopolistic intermediary the tradeoff between the bid-ask spread and the costs of delay during private search determine the intermediary's clientele. In equilibrium the monopolist charges a positive spread. Traders with large gains from trade prefer to deal with him, whereas traders with relatively low gains from trade engage in search. In case of competition among intermediaries the classical Bertrand result obtains and bid and ask prices converge to the (unique) Walrasian equilibrium price. Thus in the confines of the model the Walrasian auctioneer of the market under consideration can be replaced by competing intermediaries. In addition a multiplicity of subgame perfect Nash edquilibria emphasizes the coordination problemms inherent in models of intermediation.
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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number
1058.
Length: Date of creation: Aug 1993 Date of revision: Handle: RePEc:nwu:cmsems:1058
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Find related papers by JEL classification: C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
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Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2004.
"Over-the-Counter Markets,"
NBER Working Papers
10816, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Matthew O. Jackson & Sandro Brusco, 1997.
"The Optimal Design of a Market,"
Discussion Papers
1186, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
[Downloadable!]