Intermediated Markets with Posted Prices

GSIA Working Paper No. 2002-E14

33 Pages Posted: 15 Aug 2002

See all articles by Christine A. Parlour

Christine A. Parlour

University of California, Berkeley - Finance Group

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Date Written: July 24, 2002

Abstract

We consider a model of intermediated trade for a financial asset. Agents' valuation for the asset includes both a private and a common value component. A third party posts a price at which trade can occur, and a buyer and seller simultaneously decide whether to accept or reject the trade. We show that trade can be ex post inefficient, in the sense that a high value seller sells the good to a lower value buyer. Under specified conditions, any price at which trade occurs leads to inefficient trade with positive probability. We compare two objectives: volume maximization and welfare maximization. With symmetric priors over agents' private values, these lead to the same outcome, but, in general, imply different prices. Both objectives imply that a consummated trade is inefficient with positive probability. We consider two notions of informativeness, value informativeness and allocative informativeness. There is a tradeoff between informativeness and volume or welfare. In particular, small transactions costs, which reduce the volume of trade, can improve the informativeness of the outcome.

Keywords: posted prices, beliefs, inefficient trade

JEL Classification: C70, D82

Suggested Citation

Parlour, Christine A. and Rajan, Uday, Intermediated Markets with Posted Prices (July 24, 2002). GSIA Working Paper No. 2002-E14, Available at SSRN: https://ssrn.com/abstract=320147 or http://dx.doi.org/10.2139/ssrn.320147

Christine A. Parlour (Contact Author)

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Uday Rajan

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

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