Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2024-03-20
Number: 24-019/IV
Author-Name: Natalie Kessler
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: Iman van Lelyveld
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: Ellen van der Woerd
Author-Workplace-Name: De Nederlandsche Bank
Title: Exclusive Portfolio Dealing and Market Inefficiency
Abstract: We rationalize exclusive portfolio dealing in a novel three-period partial equilibrium framework populated by a representative, risk-neutral seller and a small number of ex ante identical broker-dealers. Endowed with independent, uncertain demand for a representative asset, the broker-dealers may compete in prices for exclusivity. If no exclusivity is granted, due to either the lack or seller rejection of offers, the seller enters a second-price auction with a zero-loss reserve price. While seller profits are constant under exclusivity (Bertrand Paradox), auction profits increase in the number of broker-dealers. Therefore, exclusivity arises in equilibrium only for a seller with at most two broker-dealers, reducing the trade frequency by one-third. The results are robust to endogenizing the number of broker-dealers and to allowing for the ex post asymmetry in asset demand. Exclusivity, however, does not arise when the auction features a seller-optimal reserve price. We motivate and conclude with an application to the security lending market.
Classification-JEL: G14, G24, D43, D86
Keywords: Exclusive Dealing, Intermediated Markets, Competition, Market Efficiency
File-URL: https://papers.tinbergen.nl/24019.pdf
File-Format: application/pdf
File-Size: 1.015.910 bytes
Handle: RePEc:tin:wpaper:20240019