Abstract
This paper analyzes a simple search model of market making in which the agents can choose between searching for a trading partner or trading through the market‐maker. Explicit solutions for the equilibrium search intensities and the bid‐ask spread have been provided. Equilibrium search intensities and the bid‐ask spread reflect the strategic interaction between the agents and the market‐maker: an increase in the bid‐ask spread results in higher search intensities. The bid‐ask spread, on the other hand, reacts negatively to an increase in the search intensities (due to lower search costs, higher efficiency of search, or higher gains from a match). It is also shown that the introduction of a market‐maker increases the seller's reservation price and decreases the buyer's reservation price, hence narrowing the price dispersion.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
