Expertise, Information, and Dealer-intermediated OTC Markets

45 Pages Posted: 7 Jul 2020

See all articles by Zhaogang Song

Zhaogang Song

Johns Hopkins University - Carey Business School

Wei Li

Johns Hopkins University - Carey Business School

Date Written: 2020

Abstract

We develop a model of dealer-intermediated over-the-counter (OTC) markets in which customers choose their relationship dealers and dealers choose their levels of expertise, thereby determining the market structure and price informativeness jointly. We find that, in general, multiple equilibria in market structure exist. When public information is scarce or information is costly, the market tends to concentrate on a few dealers who acquire high levels of expertise. Tension arises between social welfare and customers’ gains: although the monopoly dealer market is socially optimal because of the network externality of information production, liquidity customers’ utility is maximized in a duopoly market with two dealers. When dealers differ in information production efficiency, a less efficient dealer can attract more or even all liquidity customers.

Keywords: Dealer, Expertise, Private Information, OTC, Bilateral Trading, Network

JEL Classification: G1, G11, G12, G21, D83, D53, D61

Suggested Citation

Song, Zhaogang and Li, Wei, Expertise, Information, and Dealer-intermediated OTC Markets (2020). Available at SSRN: https://ssrn.com/abstract=3624307 or http://dx.doi.org/10.2139/ssrn.3624307

Zhaogang Song (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Wei Li

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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