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Discrete Pricing and Institutional Design of Dealership Markets

Bernhardt, Dan and Hughson, Eric (1993) Discrete Pricing and Institutional Design of Dealership Markets. Social Science Working Paper, 833. California Institute of Technology , Pasadena, CA. (Unpublished)

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This paper models trade in dealership markets when the price grid is in discrete units. Strategic interaction among market makers is complex: Because prices are no longer determined by a zero expected profits condition, priority rules and the timing of offers—do market makers submit price schedules first, or do traders first submit their orders and then market makers set prices—have significant effects on equilibrium outcomes. Discreteness effectively limits competition and permits market makers to offer profitable quotes. In order-driven institutions where traders first submit orders, absolute time priority leads to the "best" price schedule, one which is "better" than that obtained from quote-driven institutions where brokers submit schedules first. This may explain the institutional structure of the NYSE.

Item Type:Report or Paper (Working Paper)
Additional Information:We wish to thank seminar participants at Caltech, Queen's University, UBC, UCLA, Stanford University, the WFA and especially Peter Algert, Peter Bossaerts, Ian Domowitz, Burton Hollifield and Bart Lipman for valuable comments. The first author acknowledges financial support from Social Sciences and Humanities Research Council. This paper incorporates results from and supersedes ('Discrete Pricing and Dealer Competition." We take sole responsibility for any errors which remain.
Group:Social Science Working Papers
Funding AgencyGrant Number
Social Sciences and Humanities Research Council (SSHRC)UNSPECIFIED
Series Name:Social Science Working Paper
Issue or Number:833
Record Number:CaltechAUTHORS:20170825-151830431
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80812
Deposited By: Jacquelyn Bussone
Deposited On:28 Aug 2017 20:48
Last Modified:03 Oct 2019 18:35

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