Implicit collusion on wide spreads
Recent empirical findings suggest that spreads quoted in dealership markets might be uncompetitive. This paper analyzes theoretically if price competition between risk--averse market--makers leaves room for implicit collusive behavior. We compare the spread and risk--sharing efficiency arising in several market structures differing in terms of i) the priority rule followed in case of ties, and ii) the type of schedules market makers may use, namely: general schedules, linear schedules, or limit orders. In general, competitive pricing does not arise in equilibrium, and there is a conflict between risk sharing efficiency and the tightness of the spread. This conflict can be mitigated by an appropriate market structure design. The limit order market is the only market structure in which the competitive equilibrium is the unique equilibrium.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ho, Thomas S Y & Stoll, Hans R, 1983. " The Dynamics of Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 38(4), pages 1053-74, September.
- Dutta, Prajit K & Madhavan, Ananth, 1997. " Competition and Collusion in Dealer Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 245-76, March.
- Harris, Lawrence E, 1994. "Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 149-78.
- Manaster, Steven & Mann, Steven C, 1996. "Life in the Pits: Competitive Market Making and Inventory Control," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 953-75.
- Dastidar, Krishnendu Ghosh, 1995. "On the Existence of Pure Strategy Bertrand Equilibrium," Economic Theory, Springer, vol. 5(1), pages 19-32, January.
- Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November.
When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:153. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.