search query: @indexterm MODEL TESTING / total: 65
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| Author: | Rust, J. Hall, G. |
| Title: | Middlemen versus Market Makers: A Theory of Competitive Exchange |
| Journal: | Journal of Political Economy
2003 : APR, VOL. 111:2, p. 353-403 |
| Index terms: | MARKET THEORY MARKET STRUCTURE MODEL TESTING ENTRY CONDITIONS |
| Language: | eng |
| Abstract: | The authors present a model in which the microstructure of trade in a commodity or asset is endogenously determined. The authors consider an initial equilibrium with which there are no market makers but there is free entry of middlemen with heterogeneous transactions costs. The authors characterize conditions under which entry of a single market maker can be profitable even though it is common knowledge that all surviving middlemen will undercut the market maker's publicly posted bid and ask prices in the postentry equilibrium. The market maker's entry induces the surviving middlemen to reduce their bid-ask spreads, and as a result, all producers and consumers who choose to participate in the market enjoy a strict increase in their expected gains from trade. |
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