| Abstract: | This paper analyzes a simple search model of market making in which the agents can choose between searching for a trading partner or trading through the market-maker. Explicit solutions for the equilibrium search intensities and the bid-ask spread have been provided. Equilibrium search intensities and the bid-ask spread reflect the strategic interaction between the agents and the market-maker: an increase in the bid-ask spread results in higher search intensities. The bid-ask spread, on the other hand, reacts negatively to an increase in the search intensities (due to lower search costs, higher efficiency of search, or higher gains from a match). It is also shown that the introduction of a market-maker increases the seller's reservation price and decreases the buyer's reservation price, hence narrowing the price dispersion. |
