A Model of Middlemen and Oligopolistic Market Makers

30 Pages Posted: 19 Jan 2009 Last revised: 29 Jan 2009

See all articles by Jiandong Ju

Jiandong Ju

Tsinghua University - PBC School of Finance

Scott C. Linn

University of Oklahoma - Michael F. Price College of Business

Zhen Zhu

University of Central Oklahoma - Department of Economics

Date Written: January 14, 2009

Abstract

This paper studies the endogenous structure of intermediation when heterogeneous intermediaries choose between becoming a middleman or a market maker, and the relation between the equilibrium market structure and price dispersion. We obtain three main results: First, middlemen and oligopolistic market makers can coexist in the market equilibrium. All market makers publicly post unique ask and bid prices. These prices serve as the high and low bounds respectively for the ask and bid prices of middlemen, when capacity cost is sufficiently large. Second, more efficient intermediaries choose to become market makers, while less efficient intermediaries choose to become middlemen. Third, if the fixed cost of capacity installation for market makers increases, the number of market makers declines, while the number of middlemen increases. As a result, both ask prices and bid prices become more dispersed.

Keywords: oligopolistic market makers; middlemen; intermediaries; price dispersion

JEL Classification: D43, L11, L13

Suggested Citation

Ju, Jiandong and Linn, Scott C. and Zhu, Zhen, A Model of Middlemen and Oligopolistic Market Makers (January 14, 2009). Available at SSRN: https://ssrn.com/abstract=1329027 or http://dx.doi.org/10.2139/ssrn.1329027

Jiandong Ju

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Scott C. Linn (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

3704 Windover Drive
Norman, OK 73072
United States
405-595-7426 (Phone)

Zhen Zhu

University of Central Oklahoma - Department of Economics ( email )

Edmond, OK 73034
United States

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