Bid-Ask Spreads with Indirect Competition among Specialists

Thomas Gehrig and Matthew Jackson

No 1648, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the bid-ask quotes offered by specialists (or dealers) who face indirect competition from other specialists who trade in related assets. In the context of a simple model where investors have mean variance preferences, we characterize the equilibrium bids and asks quoted by K specialists in N assets, where some specialists may control more than one asset. We compare the equilibrium spreads as the number (and factor structure) of the assets each specialist controls is varied. It is shown that for some constellations of initial portfolio holdings and asset covariance it is socially preferable to have competing specialists, while for others it is socially preferable to have their actions coordinated (or to have one specialist control several assets). In a simple factor model, we show how the optimal specialist control structure depends on whether the assets trade as substitutes or complements. In some situations it is beneficial to have specialist power concentrated within industries, in other situations, across industries, and in yet other situations, not to be concentrated at all.

Keywords: Bid-Ask Spread; Indirect Competition; Market Structure (search for similar items in EconPapers)
JEL-codes: D43 G12 (search for similar items in EconPapers)
Date: 1997-05
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Related works:
Journal Article: Bid-ask spreads with indirect competition among specialists (1998)
Working Paper: Bid-Ask Spreads with Indirect Competition Among Specialists (1994)
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