When It's Not The Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market

  • Author(s): CHRISTOPHER G. LAMOUREUX, CHARLES R. SCHNITZLEIN
  • Published: Apr 18, 2012
  • Pages: 683-712
  • DOI: 10.1111/j.1540-6261.1997.tb04818.x

ABSTRACT

We report results from experimental asset markets with liquidity traders and an insider where we allow bilateral trade to take place, in addition to public trade with dealers. In the absence of the search alternative, dealer profits are large—unlike in models with risk‐neutral, competitive dealers. However, when we allow traders to participate in the search market, dealer profits are close to zero. Dealers compete more aggressively with the alternative trading avenue than with each other. There is no evidence that price discovery is less efficient when the specialists are not the only game in town.

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