American Economic Review Vol. 78 No. 1 1988
The Division of Markets Is Limited by the Extent of Liquidity (Spatial Competition with Externalities)
Abstract
Liquidity considerations will limit the number of markets in a competitive economy. Welfare implications are ambiguous. Since liquidity is a positive externality, there may be too little liquidity per market at a noncooperative equilibrium and too many markets compared to the surplus-maximizing market structure. But liquidity is also self-reinforcing. Given an existing equilibrium, new markets may not open because nobody wants to use a new market with low liquidity. There may be too few markets to achieve efficiency and new markets will not open. A nondiscriminating monopolist will operate smaller and more numerous markets compared to optimality as well as to the equilibrium of independent auctioneers.
- Volume
- 78
- Issue
- 1
- Pages
- 108-121
- Sources
- bibtex:phds-export.bib