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Horizontally Differentiated Market Makers

  • Simon Loertscher

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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File URL: http://www.vwl.unibe.ch/papers/dp/dp0510.pdf
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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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  1. repec:rus:hseeco:72158 is not listed on IDEAS
  2. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-29, July.
  3. John Rust & George Hall, 2002. "Middlemen versus Market Makers: A Theory of Competitive Exchange," NBER Working Papers 8883, National Bureau of Economic Research, Inc.
  4. Daniel F. Spulber, 1996. "Market Microstructure and Intermediation," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 135-152, Summer.
  5. Yavas Abdullah, 1995. "Can Brokerage Have an Equilibrium Selection Role?," Journal of Urban Economics, Elsevier, vol. 37(1), pages 17-37, January.
  6. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 559-80, October.
  7. repec:cup:cbooks:9780521736602 is not listed on IDEAS
  8. 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.
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