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The Economics of Markets: A Simple Model of the Market-Making Process

John P. Gould
The Journal of Business
Vol. 53, No. 3, Part 2: Interfaces Between Marketing and Economics (Jul., 1980), pp. S167-S187
Stable URL: http://www.jstor.org/stable/2352221
Page Count: 21
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Economics of Markets: A Simple Model of the Market-Making Process
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Abstract

A simple model involving two traders, each of whom stands to gain by trading, is developed. The traders must expend resources to find each other so that trade can take place. The effects of changing the gains and costs from trading on the amount of "marketing" effort expended by each of the traders are examined. It is found that increasing the gains from trading need not increase the amount of search expenditures made by the traders and may in fact result in a reduction in the probability that trade occurs. This is because there are external effects that the traders do not take into account when making search decisions that are optimal from their individual viewpoints. These externalities suggest that both traders may gain from the emergence of a middleman who acts as a market maker and takes the externalities into account.

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