Lecture notes
ECON0123 Week 10
- Module
- Economics (ECON0123)
- Institution
- University College London (UCL)
In depth notes on ECON0123 Week 10
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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
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