The Emergence of Market Structure

60 Pages Posted: 19 Mar 2017 Last revised: 26 Jun 2023

See all articles by Maryam Farboodi

Maryam Farboodi

Princeton University - Bendheim Center for Finance

Gregor Jarosch

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Robert Shimer

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2017

Abstract

What market structure emerges when market participants can choose the rate at which they contact others? We show that traders who choose a higher contact rate emerge as intermediaries, earning profits by taking asset positions that are misaligned with their preferences. Some of them, middlemen, are in constant contact with other traders and so pass on their position immediately. As search costs vanish, traders still make dispersed investments and trade occurs in intermediation chains, so the economy does not converge to a centralized market. When search costs are a differentiable function of the contact rate, the endogenous distribution of contact rates has no mass points. When the function is weakly convex, faster traders are misaligned more frequently than slower traders. When the function is linear, the contact rate distribution has a Pareto tail with parameter 2 and middlemen emerge endogenously. These features arise not only in the (inefficient) equilibrium allocation, but also in the optimal allocation. Moreover, we show that intermediation is key to the emergence of the rest of the properties of this market structure.

Suggested Citation

Farboodi, Maryam and Jarosch, Gregor and Shimer, Robert J., The Emergence of Market Structure (March 2017). NBER Working Paper No. w23234, Available at SSRN: https://ssrn.com/abstract=2935439

Maryam Farboodi (Contact Author)

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

Gregor Jarosch

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert J. Shimer

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-9015 (Phone)
773-702-8490 (Fax)

HOME PAGE: http://home.uchicago.edu/~shimer/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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