Evolutionary Market-Making: Economics vs. Finance

Abstract

Markets are the basic institutions that lie at the heart of most economic and financial analyses. It is surprising, then, how very little work has been done on the existence of markets themselves. We investigate a model of non-sequential search, where potential buyers and sellers seek each other out. Specifically, we analyze the implications of two paradigms. The first is economic, involving Nash equilibrium and evolutionary game theory. The second is financial and is rooted in the no-arbitrage paradigm. It as well has an evolutionary interpretation. The contrast in the conditions that are required for equilibrium under these two paradigms illuminates some fundamentally different implications between economics and finance for the existence of markets and price dispersion.

JEL Classification: D00