Markets Versus Negotiations: The Emergence of Centralized Markets

Hebrew University, CRIDT Working Paper No. 239

26 Pages Posted: 19 Feb 2001

See all articles by Zvika Neeman

Zvika Neeman

Tel Aviv University - Eitan Berglas School of Economics; Boston University - Department of Economics

Nir Vulkan

University of Oxford - Said Business School

Date Written: January 2001

Abstract

We study the incentives of privately informed traders who have access to two forms of trade: direct negotiations with a small number of buyers and sellers (or decentralized trade), and centralized markets with a relatively large number of buyers and sellers. We show that "weak" trader types (that is, buyers with a high willingness to pay and sellers with low costs) will prefer to trade through centralized markets. This leads to a complete unraveling of direct negotiations, so that ultimately, all "serious" buyers and sellers opt for trading through the centralized market. Once this happens, no trader can profitably trade through direct negotiations.

Keywords: centralized markets, decentralized markets, decentralized bargaining, market microstructure

JEL Classification: C78, D40, L10

Suggested Citation

Neeman, Zvika and Vulkan, Nir, Markets Versus Negotiations: The Emergence of Centralized Markets (January 2001). Hebrew University, CRIDT Working Paper No. 239. Available at SSRN: https://ssrn.com/abstract=260740 or http://dx.doi.org/10.2139/ssrn.260740

Zvika Neeman (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

HOME PAGE: http://www.tau.ac.il/~zvika/

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-3184 (Phone)
617-353-4449 (Fax)

Nir Vulkan

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 01865 288929, or 288338 (Phone)
+44 01865 288805 (Fax)

HOME PAGE: https://vulkan.worc.ox.ac.uk/

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