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The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)


  • Economides, Nicholas
  • Siow, Aloysius


Liquidity considerations will limit the number of markets in a competitive economy. Welfare implications are ambigious. Since liquidity is a positive externality, there may be too little liquidity per market at a noncooperative equilibrium and too many markets compared to the surplus-maximizing market structure. But liquidity is also self-reinforcing. Given an existing equilibrium, new markets may not open because nobody wants to use a new market with low liquidity. There may be too few markets to achieve efficiency. A nondiscriminating monopolist will operate smaller and more numerous markets compared to optimality as well as to the equilibrium of independent auctioneers. Copyright 1988 by American Economic Association.

Suggested Citation

  • 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 108-121, March.
  • Handle: RePEc:aea:aecrev:v:78:y:1988:i:1:p:108-21

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