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Market Microstructure and Intermediation

  • Daniel F. Spulber

This paper emphasizes the important role played by intermediaries in the economy, including wholesalers, retailers, and financial firms. The paper defines an intermediary as an economic agent that purchases from suppliers for resale to buyers or that helps buyers and sellers meet and transact. Intermediaries coordinate transactions and provide the institutions of exchange that constitute market microstructure. Intermediaries set prices, manage inventories, coordinate exchange, and provide information through guarantees and delegated monitoring. These crucial activities help to explain how markets attain equilibrium prices and quantities. The paper suggests that the study of intermediation should be incorporated into mainstream economic analysis.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.10.3.135
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 10 (1996)
Issue (Month): 3 (Summer)
Pages: 135-152

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Handle: RePEc:aea:jecper:v:10:y:1996:i:3:p:135-52
Note: DOI: 10.1257/jep.10.3.135
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  1. Yuk-Shee Chan., 1982. "On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Research Program in Finance Working Papers 127, University of California at Berkeley.
  2. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Ho, Thomas & Stoll, Hans R, 1980. " On Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 35(2), pages 259-67, May.
  4. Spulber, Daniel F., 1985. "Risk sharing and inventories," Journal of Economic Behavior & Organization, Elsevier, vol. 6(1), pages 55-68, March.
  5. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September.
  6. Amihud, Yakov & Mendelson, Haim, 1980. "Dealership market : Market-making with inventory," Journal of Financial Economics, Elsevier, vol. 8(1), pages 31-53, March.
  7. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
  8. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Benston, George J. & Hagerman, Robert L., 1974. "Determinants of bid-asked spreads in the over-the-counter market," Journal of Financial Economics, Elsevier, vol. 1(4), pages 353-364, December.
  10. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
  11. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
  12. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  13. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  14. Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, December.
  15. Cohen, Kalman J, et al, 1981. "Transaction Costs, Order Placement Strategy, and Existence of the Bid-Ask Spread," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 287-305, April.
  16. Carlton, Dennis W, 1991. "The Theory of Allocation and Its Implications for Marketing and Industrial Structure: Why Rationing Is Efficient," Journal of Law and Economics, University of Chicago Press, vol. 34(2), pages 231-62, October.
  17. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  18. Chin Lim, 1981. "Risk Pooling and Intermediate Trading Agents," Canadian Journal of Economics, Canadian Economics Association, vol. 14(2), pages 261-75, May.
  19. Logue, Dennis E, 1975. "Market-Making and the Assessment of Market Efficiency," Journal of Finance, American Finance Association, vol. 30(1), pages 115-23, March.
  20. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
  21. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
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