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Exchange Markets: A Welfare Comparison of Market Maker and Walrasian Systems

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  • Pipat Pithyachariyakul

Abstract

This paper compares the social welfare of a simple economy with asymmetric information under two different exchange market structures, Walrasian and the monopolistic, price-setting schemes. It is found that the relative efficiency depends on the nature of uncertainties in the economy. For some environments, the price-setting allocation with a market maker Pareto dominates the rational expectations equilibrium allocation in a competitive market. This finding provides a justification for the existence of the market maker system, which is the predominant institutional arrangement in many exchange markets.

Suggested Citation

  • Pipat Pithyachariyakul, 1986. "Exchange Markets: A Welfare Comparison of Market Maker and Walrasian Systems," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(1), pages 69-84.
    • Handle: RePEc:oup:qjecon:v:101:y:1986:i:1:p:69-84.
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    File URL: http://hdl.handle.net/10.2307/1884642
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    Cited by:

    1. Kei Kawakami, 2014. "Information Aggregation and Optimal Market Size," Department of Economics - Working Papers Series 1182, The University of Melbourne.
    2. Kei Kawakami, 2017. "Welfare Consequences of Information Aggregation and Optimal Market Size," American Economic Journal: Microeconomics, American Economic Association, vol. 9(4), pages 303-323, November.
    3. Kei Kawakami, 2013. "Optimal Market Size," Department of Economics - Working Papers Series 1168, The University of Melbourne.
    4. Fricke, Daniel & Gerig, Austin, 2014. "Liquidity Risk, Speculative Trade, and the Optimal Latency of Financial Markets," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100402, Verein für Socialpolitik / German Economic Association.

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