Microstructure with multiple assets: an experimental investigation into direct and indirect dealer competition |
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Institution: | 1. Department of Economics and Economic Science Laboratory, Eller College of Management, The University of Arizona; Tucson, AZ, USA;1. Sheffield Business School, Sheffield Hallam University, City Campus, Howard Street, Sheffield S1 1WB, UK;2. Division of Economics, School of Social Sciences, Nanyang Technological University, 14 Nanyang Drive HSS 04-70, 637332, Singapore |
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Abstract: | This paper uses the economic laboratory to isolate the effects of direct and indirect competition on dealer profitability. We compare these two settings: (1) three competing dealers in a single asset (direct competition) with (2) three assets with a monopoly dealer in each (indirect competition). We find that: bid–ask spreads are wider, prices are less responsive to order flow (so there is less price discovery), and per-trade dealer profits are larger in the single-asset setting. Important economic differences between these two settings include a heightened adverse selection problem in the three-asset setting and a public good nature of price discovery in the one-asset setting. |
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