The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Competition and Collusion in Dealer Markets
Published: 04/18/2012 | DOI: 10.1111/j.1540-6261.1997.tb03815.x
PRAJIT K. DUTTA, ANANTH MADHAVAN
This article develops a game‐theoretic model to analyze market makers' intertemporal pricing strategies. We show that dealers who adopt noncooperative pricing strategies may set bid‐ask spreads above competitive levels. This form of “implicit collusion” differs from explicit collusion, where dealers cooperate to fix prices. Price discreteness or asymmetric information are not required for collusion to occur. Rather, institutional arrangements that restrict access to the order flow are important determinants of the ability to collude because they reduce dealers' incentives to compete on price. Public policy efforts to increase interdealer competition should focus on such restrictions.