Natural Oligopoly in Intermediated Markets

Thomas Gehrig

CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX.

Abstract: The industrial structure of an intermediation industry is analysed in brokerage markets, where intermediaries help to reduce search frictions. The aspect of competition in intermediated markets is analysed in an `island economy', in which intermediaries invest in information networks, which allow them to inform the market about their price offers. Larger networks allow them to reach more markets and potential customers. This enhances trading probabilities. Thus the size of the information network may be viewed as a quality attribute by market participants. Price competition among intermediaries therefore exhibits features of imperfect price competition in markets of vertically differentiated products. It is shown that the number of intermediaries active in a symmetric equilibrium is bounded independently of the size of the market, as long as investments are costly. Thus, the market constitutes a natural oligopoly in the sense of Shaked and Sutton (1983) and convergence to a fragmented industrial structure does not obtain as the economy grows large. In particular, we find a natural oligopoly in which in general there are three larger intermediaries of similar size and one smaller intermediary occupying niche markets. Nevertheless, as the number of islands increases, spreads shrink to zero and almost competitive allocations arise.

Keywords: Intermediation; Vertical Product Differentiation; Industrial Structure; Natural Oligopoly; Network Competition (search for similar items in EconPapers)
Date: 1990-09
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Working Paper: Natural Oligopoly in Intermediated Markets (1993)
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