What is it about?
This paper shows that when traders go to a middleman only if they cannot get a better price somewhere else, the two popular evaluation criteria for middleman — low bid-ask spreads and low inventory holding costs — may be inconsistent.
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Why is it important?
Market makers are considered good if they have low bid-ask spreads and low inventory holding costs. This is the first paper which showed that the two criteria may be inconsistent.
Perspectives
I learnt about search models from my coauthor.
Professor Utpal Bhattacharya
Hong Kong University of Science and Technology
Read the Original
This page is a summary of: In search of the right middleman, Economics Letters, January 1993, Elsevier,
DOI: 10.1016/0165-1765(93)90082-n.
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