CeDEx Seminar - Klaus Ritzberger (Royal Holloway)

Intermediation with price competition

Intermediaries can invest into a technology that allows them to squeeze in between buyers and sellers. Yet, whether or not this investment succeeds is random and only observable upon the arrival of at least one side of the market (supply or demand). In fact, when setting prices intermediaries do not know which side of the market will arrive first or whether both sides will arrive simultaneously. There are parameter constellations where intermediation still results in the competitive allocation. For other parameters we find mixed equilibria, implying excess volatility of price, as well as monopolistic equilibria where one intermediary corners the market. Hence, that intermediaries have to act strategically both on the input and on the output side makes these markets fragile and volatile.