Implicit Collusion in Dealer Markets with Different Costs of Market Making

Andreas Krause
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Andreas Krause: University of Fribourg, Switzerland

Finance from EconWPA

Abstract: This paper introduces different costs into the Dutta-Madhavan model of implicit collusion between market makers. It will be shown how different costs of market making influence the possibility of implicit collusion and the price setting. The derived model will then be applied to the case of discrete prices. We will see how the tick size and the location of the reservation prices relative to the price grid affect the price setting. It will be shown which problems arise when examining the developed model in an empirical investigation. It is shown that the empirical evidence may only be very poor, even under ideal circumstances. Finally policy implications are considered.

Keywords: Bid-Ask Prices; Market Maker; Implicit Collusion (search for similar items in EconPapers)
JEL-codes: G12 C72 (search for similar items in EconPapers)
Date: 1999-03-10
Note: Type of Document - PostScript; prepared on IBM PC ; to print on PostScript; pages: 24 ; figures: included
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:9903002

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