IDEAS home Printed from https://ideas.repec.org/p/hal/journl/halshs-00006428.html

Reputation-based pricing and price improvements in dealership markets

Author

Listed:
  • Thierry Foucault

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Gabriel Desgranges

Abstract

Dealers often offer price improvements, relative to posted quotes, to their clients. In this paper, wepropose an explanation to this practice. We also analyze its effects on market liquidity and traders' welfare.Enduring relationships allow dealers to avoid informed trades by offering price improvements to clients who do not trade with the dealer when they are informed. A dealer never observes whether a specific client is informed or not but he can avoid informed orders by conditioning his offers on past trading profits. Cream-skimming of uninformed order-flow increases the risk of informed trading for dealers without a relationship. Thus, authorizing price improvements increases bid-ask spreads and impairs the welfare of investors without a relationship. It may even decrease the welfare of investors who develop a relationship as they sometimes need to trade at posted quotes. The model predicts a positive relationship between (a) the price improvements granted to a specific investor and past trading profits with this investor or (b) the frequency of price improvements and bid-ask spreads

Suggested Citation

  • Thierry Foucault & Gabriel Desgranges, 2005. "Reputation-based pricing and price improvements in dealership markets," Post-Print halshs-00006428, HAL.
    • Handle: RePEc:hal:journl:halshs-00006428
    DOI: 10.1016/j.jeconbus.2005.09.001
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a
    for a similarly titled item that would be available.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Battalio, Robert & Ellul, Andrew & Jennings, Robert, 2005. "Reputation effects in trading on the New York Stock Exchange," LSE Research Online Documents on Economics 24659, London School of Economics and Political Science, LSE Library.
    2. Hörner, Johannes & Lovo, Stefano & Tomala, Tristan, 2018. "Belief-free price formation," Journal of Financial Economics, Elsevier, vol. 127(2), pages 342-365.
    3. Degryse, H.A., 2007. "Competition on financial markets : Does market design matter?," Other publications TiSEM ee5530b2-34f7-4d95-ad62-f, Tilburg University, School of Economics and Management.
    4. Kaun Y. Lee & Kee H. Chung, 2009. "Information‐Based Trading and Price Improvement," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 754-773, June.
    5. Pierre Collin‐Dufresne & Benjamin Junge & Anders B. Trolle, 2020. "Market Structure and Transaction Costs of Index CDSs," Journal of Finance, American Finance Association, vol. 75(5), pages 2719-2763, October.
    6. Theissen, Erik, 2003. "Organized equity markets in Germany," CFS Working Paper Series 2003/17, Center for Financial Studies (CFS).
    7. He, Yinghua & Nielsson, Ulf & Guo, Hong & Yang, Jiong, 2014. "Subscribing to transparency," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 189-206.
    8. Asaf Bernstein & Eric Hughson & Marc D. Weidenmier, 2014. "Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse," NBER Working Papers 20459, National Bureau of Economic Research, Inc.
    9. Pierre Collin-Dufresne & Benjamin Junge & Anders B. Trolle, 2018. "Market Structure and Transaction Costs of Index CDSs," Swiss Finance Institute Research Paper Series 18-40, Swiss Finance Institute.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-00006428. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.