Price Competition between Market Makers
This paper explicitly models price competition in financial markets in which prices are quoted by competing dealers before future demand is observed. The strategic behavior of informed insiders and uninformed liquidity traders implies that a growing number of marketmakers leads to a higher risk exposure for the individual marketmaker, which induces higher individual bid-ask spreads and higher transaction costs for the liquidity traders. Under certain conditions, liquidity traders would prefer a monopolistic marketmaker rather than several competing marketmakers. The results hold under various assumptions on the strategy space of the marketmakers. Copyright 1993 by The Review of Economic Studies Limited.
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Volume (Year): 60 (1993)
Issue (Month): 3 (July)
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