The Division of Markets is Limited by the Extent of Liquidity (Spatial Competition with Externalities)

Nicholas Economides () and Aloysius Siow ()

American Economic Review, 1988, vol. 78, issue 1, 108-21

Abstract: Liquidity considerations will limit the number of markets in a competitive economy. Welfare implications are ambigious. 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. A nondiscriminating monopolist will operate smaller and more numerous markets compared to optimality as well as to the equilibrium of independent auctioneers. Copyright 1988 by American Economic Association.

Date: 1988
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