Implicit Collusion on Wide Spreads

Posted: 26 Apr 1998

See all articles by Bruno Biais

Bruno Biais

Centre for Economic Policy Research (CEPR)

Thierry Foucault

HEC Paris - Finance Department

Francois Salanie

National Institute for Agricultural Research (INRA); University of Toulouse 1 - Toulouse School of Economics (TSE)

Abstract

Recent empirical findings suggest that spreads quoted in dealership markets might be uncompetitive. This paper analyzes theoretically if price competition between risk-averse market-makers leaves room for implicit collusive behavior. We compare the spread and risk-sharing efficiency arising in several market structures differing in terms of i) the priority rule followed in case of ties, and ii) the type of schedules market-makers may use, namely: general schedules, linear schedules, or limit orders. In general, competitive pricing does not arise in equilibrium, and there is a conflict between risk-sharing efficiency and the tightness of the spread. This conflict can be mitigated by an appropriate market structure design. The limit order market is the only market structure in which the competitive equilibrium is the unique equilibrium.

JEL Classification: D40

Suggested Citation

Biais, Bruno and Foucault, Thierry and Salanie, Francois, Implicit Collusion on Wide Spreads. Available at SSRN: https://ssrn.com/abstract=7668

Bruno Biais

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Thierry Foucault (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Francois Salanie

National Institute for Agricultural Research (INRA) ( email )

21, Allee de Brienne
31000 Toulouse
France

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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