Comments on "The Economics of Markets: A Simple Model of the Market-Making Process"

Abstract

Markets rarely emerge in a vacuum, and potential traders soon discover that they may spend more time, energy, and other resources discovering or making a market than on the trade itself. This predicament is shared equally by currency traders, do-it-yourself realtors, and streetwalkers! Their dilemma, however, seems to have gone largely unnoticed by economists, who simply assume that somehow traders will eventually be appraised of each other' s existence-to their mutual benefit or subsequent regret. Will such markets emerge? At which costs and whose costs? Under what conditions? Using a simple two-trader model, J. P. Gould (this issue) analyzes some of the determinants of the market-making process. His model attempts to relate the amount of resources (search expenditures) expended in market seeking to the gains from trade accruing to each party. The hypothetical nature of eventual trading is not forgotten, as each trader finds his counterpart with only some probability. Finally, this probability depends directly on the amount of resources devoted to the search. To clarify some of the issues addressed herein and the conclusions drawn in this paper, we first summarize the main results of this model before examining some of the key concepts bearing on this study.