Lecture notes
ECON0123 Week 10
- Module
- Economics (ECON0123)
- Institution
- University College London (UCL)
In depth notes on ECON0123 Week 10
[Show more]
Seller
Follow
Content preview
Markets with intermediated goodsWeek 10
BP Ch.22
Intro
Roles of intermediaries:
• A dealer buys from suppliers and resells to buyers
• A platform operator provides a platform wheee buyers and sellers interact
• An infomediary acts as an information gatekeeper, by allowing consumers to access and process
information about prices or match the value of products and services
• A trusted third party acts as a certi cation agent by revealing information about a product’s or
seller’s reliability of quality
Only rst two will be discussed
Intermediated vs non intermediated trade:
• Non intermediated- there exists a decentralised market where buyers and sellers interact without
intermediary
◦ Buyers and sellers are not charged for joining
◦ They are matched randomly
• Intermediated- a market maker can buy and sell the product at a price di erence and make a
pro t, even if agents may participate for free in the random matching market
Dealer model
Unitmass
of
heterogeneousbuyers 5withvaluationVa 5withy
Assume
Vasavisa
Unitmass sellers costa c
Gains tradesplit
from equally Vuandc ofmatch
alwaystraderegardless
Randommatching
Type Expectedsurplus tradesize 75 welfare geht É
c
V stun yea mat and ontradesize 5welfare
y
Co
Ca
Y
5 Y c
Intermediated exchange
• Intermediary sets pro t maximising bid-ask (wholesale-retail) prices
• At the equilibrium the bid, b, and ask, a, must ensure that strong traders prefer intermediated
exchange and weak traders never seek the intermediary
◦ If b and a satisfy these conditions, only strong traders populated the intermediated exchange
◦ If a strong buyer is sure to nd a strong seller in the intermediated exchange, their surplus is
higher than in the open market, so is willing to pay a higher price than in the open market
• At the equilibrium the highest price a that the intermediary can ask a strong buyer makes them
indi erent between intermediated exchange and open market: tried2
via
, • By the same reasoning for buyers
Ivica 2 b c
IT Slab thrattlered
a Y b I Intermediary'sprofit
4
donotenterasv cacab
Weakt raders
• In equilibrium, strong traders self-select into the intermediated market
• The presence of a pro t-maximizing dealer leads to endogenous sorting according to type
• The intermediary makes positive pro t because he o ers strong traders a better deal than the
matching market
• Intermediated trade also improves welfare by avoiding socially ine cient trade
• A random-matching market creates pro table opportunities for intermediaries to operate
centralized exchanges
Dealer vs intermediary
Dealer:
• Buys from sellers and resells to buyers
• Price is centralised- the dealer sets prices for
both sized
Platform operator:
• O ers buyers and sellers access to a platform
• Price is decentralised, traders set prices and
the platform taxes trade
Intermediary model
Assume:
• Sellers pay a usage fee and have price setting power
• Unit mass of sellers and a unit mass of buyers
• Each seller produces a totally di erentiated good at a constant unit cost c, uniformly distributed
over [0,1]
• The intermediary has zero variable costs
• All sales have to go through the intermediary, there are no direct exchanges between buyers and
sellers
Dealer intermediation
• The dealer makes take it or leave it o ers to both sides of the market, setting asking price p for
buyers and bid price b=(p-t) for sellers
◦ The transaction fee t=a-b corresponds to the bid ask spread
1 Intermediarysetspandt
2 Buyersand
sellersacceptreject
I p E p tiindifferentbuyer
and
s eller
ie notpactiveb uyersandnsp tsellers
dealer
solves ITIp.H
mpg tnbns.tl p pt pd43th'sndends 3 IT 427
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller zctpfru. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £7.16. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
66579 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now