Dynamics of Wholesale Bid-Ask Spreads in Vertical Markets

Abstract

This paper investigates the short run efficiency of wholesale markets within the context of vertical markets. We propose a partial adjustment model to examine the dynamics of the wholesale bid-ask spread and determine whether this has any impact on hoarding at the wholesale level. The dynamics of Bid-Ask spread is then endogenised in a general model of price transmission at the retail level to determine the impact of such dynamics on a) price transmission and b) the extent of hoarding. Finally we test this generalized model against the extant models of price transmission and show that the generalization is more appropriate.

Keywords: Bid-Ask spread, Vertical markets, Asymmetric price transmission, Partial adjustment

JEL Classification: C32, D43, Q13, Q18