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Price Improvement in Dealership Markets

Matthew Rhodes-Kropf ()

The Journal of Business, 2005, vol. 78, issue 4, 1137-1172

Abstract: Price improvement refers to the practice whereby dealers offer executions that improve on quoted prices. Why are these improvements given? Standard thinking is that competition causes dealers to give better prices to customers with less information. This paper contrasts this with a novel theory in which customers negotiate improvements and differential pricing arises from differences in customers' market power. Each theory affects the formation of bid/ask spreads in empirically distinguishable ways. Understanding price improvement and its impact on market participants is critical the regulation of markets, particularly since equal execution is such an important stated goal of the SEC.

Date: 2005
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