Entry-deterring agency

We provide a model in which an intermediary can choose between wholesale or agency. The possibility that buyers and sellers transact directly limits his market power and, thus, creates incentives for him to deter the emergence of bilateral exchanges. In equilibrium, the intermediary chooses agency a...

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Bibliographic Details
Published in:Games and economic behavior 2020-01, Vol.119, p.172-188
Main Authors: Loertscher, Simon, Niedermayer, Andras
Format: Article
Language:English
Subjects:
Brokerage
Competing exchanges
Endogenous market structure
Entry deterrence
Humanities and Social Sciences
Platforms
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Summary:We provide a model in which an intermediary can choose between wholesale or agency. The possibility that buyers and sellers transact directly limits his market power and, thus, creates incentives for him to deter the emergence of bilateral exchanges. In equilibrium, the intermediary chooses agency and thereby pre-empts the emergence of a competing bilateral exchange if the matching technology of the competing exchange is sufficiently efficient. For symmetric Pareto distributions, whenever agency is chosen in equilibrium, consumer and social surplus decrease while listing and transaction prices tend to increase. The predictions of our model are broadly consistent with empirical evidence.
ISSN:0899-8256
1090-2473
DOI:10.1016/j.geb.2019.09.012