Market Microstructure and Informational Efficiency: The Role of Intermediation

53 Pages Posted: 12 Dec 2019 Last revised: 19 Jan 2023

See all articles by Rafael R. Guthmann

Rafael R. Guthmann

Universidad Alberto Hurtado

Brian C. Albrecht

International Center for Law & Economics (ICLE)

Date Written: January 13, 2022

Abstract

The competitive market is informationally efficient; people only need to know prices to implement a competitive allocation. However, the standard formulation of competitive markets assumes that prices are not set by strategic agents but by "supply and demand" and thus neglects the underlying role of market microstructure. We show that if prices are determined by strategic agents, then intermediation is necessary for markets to achieve informational efficiency. We study two specific market microstructures: a model where trade is intermediated by market-makers and a model of random matching and bargaining. First, we show that an economy where competition among market-makers determines prices can approximate the informational efficiency of the competitive model. Second, we show that as the complexity of the economy increases, matching markets require infinitely more information than the competitive market.

Keywords: allocation mechanisms, informational efficiency, search equilibrium, market-makers, intermediation

JEL Classification: C78, D40, D60, D82, D83

Suggested Citation

R. Guthmann, Rafael and Albrecht, Brian C., Market Microstructure and Informational Efficiency: The Role of Intermediation (January 13, 2022). Available at SSRN: https://ssrn.com/abstract=3493194 or http://dx.doi.org/10.2139/ssrn.3493194

Rafael R. Guthmann (Contact Author)

Universidad Alberto Hurtado ( email )

Casilla 14446
Correo 21
Chile

Brian C. Albrecht

International Center for Law & Economics (ICLE) ( email )

5005 SW Meadows Rd.
Suite 300
Lake Oswego, OR 97035
United States

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