Nicholas Economides* and Aloysius Siow**
Liquidity considerations will limit the number of markets in a competitive economy. Welfare implications are ambiguous. Since liquidity is a positive externality, there may be too little liquidity per market at a noncooperative equilibrium and too many markets compared to the surplus-maximizing market structure. But liquidity is also self-reinforcing. Given an existing equilibrium, new markets may not open because nobody wants to use a new market with low liquidity. There may be too few markets to achieve efficiency and new markets will not open. A nondiscrimination monopolist will operate smaller and more numerous markets compared to optimality as well as to the equilibrium of independent auctioneers.
Published in The American Economic Review, March 1988, vol. 78, no. 1, pp. 108-121.
* Stern School of Business, New York, NY 10012, tel. (212) 998-0864, fax (212) 995-4218, e-mail: email@example.com, www: http://raven.stern.nyu.edu/networks/
** Economics Department, University of Toronto.