Discussion paper
DP11437 Marketmaking Middlemen
This paper develops a model in which market structure is determined endogenously
by the choice of intermediation mode. We consider two representative business modes
of intermediation that are widely used in real-life markets: one is a middleman mode
where an intermediary holds inventories which he stocks from sellers for the purpose
of reselling to buyers; the other is a market-making mode where an intermediary offers
a platform for buyers and sellers to trade with each other. In our model, buyers
and sellers can simultaneously search in an outside market and use the intermediation
service. We show that a marketmaking middleman, who adopts the mixture of these
two intermediation modes, can emerge in a directed search equilibrium.
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