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Optimal Market Size

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  • Kei Kawakami

Abstract

This paper studies endogenous market formation in a ?nancial trading model where strategic traders face information asymmetries and aggregate shocks. First, we show that negative participation externalities can arise for a large class of assets. In a decentralized process of market formation, the negative externalities limit competition between intermediaries. The model predicts that free entry into intermediation causes market fragmentation, but it is Pareto-superior to a single market. The model also predicts that the more intense the information asymmetry, the more a security tends to trade in fragmented markets.

Suggested Citation

  • Kei Kawakami, 2013. "Optimal Market Size," Department of Economics - Working Papers Series 1168, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:1168
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    References listed on IDEAS

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    1. Cantillon, Estelle & Yin, Pai-Ling, 2011. "Competition between exchanges: A research agenda," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 329-336, May.
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    Cited by:

    1. Jérôme Dugast & Semih Üslü & Pierre-Olivier Weill, 2022. "A Theory of Participation in OTC and Centralized Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 3223-3266.
    2. Jérôme Dugast & Semih Uslu & Pierre-Olivier Weil, 2018. "Platform Trading with an OTC Market Fringe," Post-Print hal-02104107, HAL.
    3. Pierre-Olivier Weill, 2020. "The search theory of OTC markets," NBER Working Papers 27354, National Bureau of Economic Research, Inc.
    4. Bonyoung Koo & Seung Ho Yoo & Byung Cho Kim, 2017. "The bigger, the better? An investigation of optimal volume of big data," Economics Bulletin, AccessEcon, vol. 37(2), pages 871-879.

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    Keywords

    Asymmetric information; Aggregate shock; Imperfect competition; Market fragmentation; Network externality puzzle;
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