Marketmaking middeman

Résumé

This paper develops a model in which market structure is determined endogenously by the choice of intermediation mode. We consider two representative business modes of intermediation that are widely used in real-life markets: one is a market-making mode by which an intermediary offers a platform for buyers and sellers to trade by their own; the other is a middleman mode by which an intermediary holds inventories which he stocks from sellers for the purpose of reselling to buyers. In our model, buyers and sellers have an option of searching in an outside market as well as using the service offered by a monopolistic intermediary. We derive the condition under which the mixture of the two intermediation modes is selected over an exclusive use of either of the modes.