Competition and Collusion in Dealer Markets

J. OF FINANCE, Vol. 52 No. 1, March 1997

Posted: 29 Jan 1997

See all articles by Prajit K. Dutta

Prajit K. Dutta

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Ananth Madhavan

BlackRock, Inc.

Abstract

This paper develops a game-theoretic model to analyze market makers' intertemporal pricing strategies. We show that dealers who adopt non-cooperative pricing strategies may set bid-ask spreads above competitive levels. This form of "implicit collusion" differs from explicit collusion, where dealers cooperate to fix prices. Price discreteness or asymmetric information are not required for collusion to occur. Rather, institutional arrangements that restrict access to the order flow are important determinants of the ability to collude because they reduce dealers' incentives to compete on price. Public policy efforts to increase inter-dealer competition should focus on such restrictions.

JEL Classification: G19

Suggested Citation

Dutta, Prajit K. and Madhavan, Ananth, Competition and Collusion in Dealer Markets. J. OF FINANCE, Vol. 52 No. 1, March 1997. Available at SSRN: https://ssrn.com/abstract=8080

Prajit K. Dutta

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Ananth Madhavan (Contact Author)

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
3,844
PlumX Metrics