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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

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Markets versus Negotiations: The Predominance of Centralized Markets

Zvika Neeman1 / Nir Vulkan2

1Tel Aviv University,

2Oxford University,

Citation Information: The B.E. Journal of Theoretical Economics. Volume 10, Issue 1, ISSN (Online) 1935-1704, DOI: https://doi.org/10.2202/1935-1704.1554, February 2010

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The paper considers the consequences of competition between two widely used exchange mechanisms, a “decentralized bargaining'' market, and a “centralized'' market. In every period, members of a large heterogenous group of privately-informed traders who each wish to buy or sell one unit of some homogenous good may opt for trading through one exchange mechanism. Traders may also postpone their trade to a future period. It is shown that trade outside the centralized market completely unravels. In every strong Nash equilibrium, all trade takes place in the centralized market. No trade ever occurs through direct negotiations.

Keywords: centralized markets; decentralized markets; decentralized bargaining; market microstructure; competition

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