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Horizontally Differentiated Market Makers

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  • Simon Loertscher

Abstract

I present a model of competition between two market makers who are horizontally differentiated. I first show that absent a search market for buyers and sellers, there is a continuum of symmetric equilibria. These equilibria are payoff equivalent for market makers, but affect buyers' and sellers' welfare in opposite ways. Second, I analyze the model when buyers and sellers can also exchange the good in search markets. The model with search markets shares many features with existing models, yet allows competing intermediaries to net a profit in equilibrium. Interestingly, the model exhibits a complementarity between intermediaries' profits in the presence of search markets. Third, I show that every equilibrium in a game with market makers is also an equilibrium in an appropriately defined game with matchmakers

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Bibliographic Info

Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0510.

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Date of creation: Sep 2005
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Handle: RePEc:ube:dpvwib:dp0510

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Keywords: Market making; intermediation and search; horizontal differentiation; market microstructure;

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References

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  1. John Rust & George Hall, 2002. "Middlemen versus Market Makers: A Theory of Competitive Exchange," NBER Working Papers 8883, National Bureau of Economic Research, Inc.
  2. repec:rus:hseeco:72158 is not listed on IDEAS
  3. Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
  4. Spulber,Daniel F., 2009. "The Theory of the Firm," Cambridge Books, Cambridge University Press, number 9780521736602, December.
  5. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, 09.
  6. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-29, July.
  7. 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.
  8. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 559-80, October.
  9. Yavas Abdullah, 1995. "Can Brokerage Have an Equilibrium Selection Role?," Journal of Urban Economics, Elsevier, vol. 37(1), pages 17-37, January.
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Cited by:
  1. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
  2. Watanabe, Makoto, 2010. "A model of merchants," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1865-1889, September.
  3. Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
  4. Andrea Galeotti & Jose Luis Moraga-Gonzalez, 2008. "Platform Intermediation in a Market for Differentiated Products," Tinbergen Institute Discussion Papers 08-020/1, Tinbergen Institute.

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