Citation:
Vulkan, Zvika Neeman, and Nir. “Markets Versus Negotiations: The Emergence Of Centralized Markets”. Discussion Papers 2001. Web.
Abstract:
We study the incentives of privately informed traders who have access to two forms of trade: direct negotiations with a small number of buyers and sellers (or decentralized trade), and centralized markets with a relatively large number of buyers and sellers. We show that "weak" trader types (that is, buyers with a high willingness to pay and sellers with low costs) will prefer to trade through centralized markets. This leads to a complete unraveling of direct negotiations, so that ultimately, all "serious" buyers and sellers opt for trading through the centralized market. Once this happens, no trader can pro''¯tably trade through direct negotiations.