A Model of Middlemen and Oligopolistic Market Makers
University of Oklahoma - Department of Economics
Scott C. Linn
University of Oklahoma - Michael F. Price College of Business
University of Central Oklahoma - Department of Economics
January 14, 2009
This paper studies the endogenous structure of intermediation when heterogeneous intermediaries choose between becoming a middleman or a market maker, and the relation between the equilibrium market structure and price dispersion. We obtain three main results: First, middlemen and oligopolistic market makers can coexist in the market equilibrium. All market makers publicly post unique ask and bid prices. These prices serve as the high and low bounds respectively for the ask and bid prices of middlemen, when capacity cost is sufficiently large. Second, more efficient intermediaries choose to become market makers, while less efficient intermediaries choose to become middlemen. Third, if the fixed cost of capacity installation for market makers increases, the number of market makers declines, while the number of middlemen increases. As a result, both ask prices and bid prices become more dispersed.
Number of Pages in PDF File: 30
Keywords: oligopolistic market makers; middlemen; intermediaries; price dispersion
JEL Classification: D43, L11, L13working papers series
Date posted: January 19, 2009 ; Last revised: January 29, 2009
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