Auction versus Dealership Markets

This paper compares two market structures, namely auction and dealership markets defined respectively as centralized order-driven and fragmented quote-driven markets. Our approach departs from previous works comparing these market mechanisms by considering both the timing of order submission (quote versus order-driven) and trading concentration (centralized versus fragmented) as dimensions di.erentiating these trading structures. We compare markets using measures of market viability, informational e.ciency, price variance, informed trading aggressiveness and market liquidity. We find that this approach changes dramatically the results of previous works comparing these trading structures. Indeed, we prove that auction markets are less sensitive to asymmetric information problem and they exhibit higher level of informational e.ciency than dealership markets. Moreover, we find that the relative magnitude of price variance, informed trading aggressiveness and market depth in both structures depend on the market thickness. Cette étude propose une comparaison entre deux structures d'échanges dans les marchés financiers: les marchés aux enchères et les marchés de contreparties. Les marchés aux enchères sont concentrés et régis par les ordres alors que les marchés de contreparties sont fragmentés et régis par les prix. Par rapport à la littérature, cette comparaison se base sur les deux dimensions qui distinguent les deux structures, à savoir le timing de soumettre des ordres (marchés dirigés par les ordres et marchés dirigés par les prix) et le niveau de concentration dans les deux marchés (centralisation et fragmentation). De plus, la comparaison utilise différentes mesures de performances des marchés: robustesse aux problèmes d'asymétrie d'information, efficience informationnelle, variance des prix, agressivité des ordres des informés et la liquidité du marché. On montre que l'utilisation des deux dimensions qui distinguent les deux structures aboutit à des résultats parfois complètement contraires à ceux préconisés dans d'autres études utilisant une seule des deux dimensions. En effet, on montre que les marchés aux enchères sont moins sensibles aux problèmes d'asymétrie d'information et sont plus efficients. Pour la variance des prix, l'agressivité des stratégies des informés et la profondeur du marché, la comparaison dépend du nombre d'agents dans les marchés.Auction Markets, dealership markets, market performances, concentration, marchés aux enchères, marchés de contrepartie, performances des marchés, concentration

Consumer Search and Information Intermediaries

In this paper we model the market for a homogeneous good and examine the role of information in determining market outcomes. Unlike in Baye and Morgan (2001) where consumers can only learn about the prices charged by different firms by subscribing to an information intermediary’s service, we allow consumers to shop for price quotes. We are interested in determing the impact on market outcomes of allowing for this additional means of information acquisition. Relative to the case where consumers have no interest in searching for prices, consumers become no better off as the cost of search falls. The intermediary, in an effort to compensate for the loss of revenue that it might have earned from consumers, increases the fees that it charges to firms for the right to advertise their product through it. As a result, fewer firms advertise in equilibrium, and so, those that do post higher prices, and, in expectation, consumers pay more for the product. The price increase appropriates all of the gains in consumer surplus generated by the decrease in the cost of search.Search, advertising, information intermediary, price dispersion

Single versus multiple banking: lessons from initial public offerings

A vast research in banking addresses the question of the costs and benefits of multiple bank relationships versus a single bank relationship. Although no clear-cutting conclusion is reached, several contributions suggest that multiple bank relationships might lead to a suboptimal level of monitoring, compared to a single bank relationship, as a result of free riding and coordination problems. We take a novel approach to tackle this research question, by looking at the role, if any, played by the number of lending relationships in initial public offerings (IPOs). We look at the short-term performances of IPOs as measured by underpricing and find that firms that go public with multiple bank relationships exhibit more underpricing than those that go public with a single bank relationship. This finding is independent of the number of bank relationships and/or whether any of the lending banks also acts as underwriter in the offering. We interpret our results as suggesting that the market attributes a weaker certification role to multiple bank relationships because of their less effective monitoring of IPO firms

Auction versus Dealership Markets

Cette étude propose une comparaison entre deux structures d'échanges dans les marchés financiers: les marchés aux enchères et les marchés de contreparties. Les marchés aux enchères sont concentrés et régis par les ordres alors que les marchés de contreparties sont fragmentés et régis par les prix. Par rapport à la littérature, cette comparaison se base sur les deux dimensions qui distinguent les deux structures, à savoir le timing de soumettre des ordres (marchés dirigés par les ordres et marchés dirigés par les prix) et le niveau de concentration dans les deux marchés (centralisation et fragmentation). De plus, la comparaison utilise différentes mesures de performances des marchés: robustesse aux problèmes d'asymétrie d'information, efficience informationnelle, variance des prix, agressivité des ordres des informés et la liquidité du marché. On montre que l'utilisation des deux dimensions qui distinguent les deux structures aboutit à des résultats parfois complètement contraires à ceux préconisés dans d'autres études utilisant une seule des deux dimensions. En effet, on montre que les marchés aux enchères sont moins sensibles aux problèmes d'asymétrie d'information et sont plus efficients. Pour la variance des prix, l'agressivité des stratégies des informés et la profondeur du marché, la comparaison dépend du nombre d'agents dans les marchés.This paper compares two market structures, namely auction and dealership markets defined respectively as centralized order-driven and fragmented quote-driven markets. Our approach departs from previous works comparing these market mechanisms by considering both the timing of order submission (quote versus order-driven) and trading concentration (centralized versus fragmented) as dimensions di.erentiating these trading structures. We compare markets using measures of market viability, informational e.ciency, price variance, informed trading aggressiveness and market liquidity. We find that this approach changes dramatically the results of previous works comparing these trading structures. Indeed, we prove that auction markets are less sensitive to asymmetric information problem and they exhibit higher level of informational e.ciency than dealership markets. Moreover, we find that the relative magnitude of price variance, informed trading aggressiveness and market depth in both structures depend on the market thickness

The Optimality of Uniform Pricing in IPOs: An Optimal Auction Approach

This paper uses an optimal auction approach to investigate the conditions under which uniform pricing in IPOs is optimal. We show that the optimality of a uniform price in IPOs depends crucially on whether the (optimal) allocation rule is restricted. These restrictions may stem from the retail investors' budget constraint and/or from the institutional investors' preferences. We show that the main determinant of the optimality of a uniform pricing rule is the existence and the shape of the retail investors' budget constraint. In contrast, institutional investors' preferences are shown to mainly affect the optimal allocation rule. Copyright 2008, Oxford University Press.

Price versus Quantity Discrimination in Optimal IPOs

This paper addresses the issue of the choice of the optimalinstrument to sell new shares, this choice being price versusquantity discrimination (rationing). Previous results in theliterature (Benveniste and Wilhelm, 1990) show that the issuing firmwould be better off if allowed to use both price and quantitydiscrimination. This is not consistent with what we observe inpractice.Using a mechanism design approach, we derive endogenously the optimalIPO mechanism and show that it can be implemented through a uniform priceacross institutional investors and a uniform rationing, whenappropriate.Initial Public Offering; Price Discrimination; Rationing; Optimal Auction

Optimal auctions with asymmetrically informed bidders

The paper analyzes a problem of optimal auction design when the seller faces asymmetrically informed bidders. Specifically, we consider a continuum of risk-neutral uninformed bidders taking part into the auction along with n risk-averse informed bidders. The contribution of the paper is threefold. First, we fully characterize the optimal auction in this non standard environment and in a very general set-up. We find that when informed bidders reveal “bad news” about the value of the good, the seller optimally awards the object to the uninformed bidders. Secondly, we show that the seller is better off in presence of uninformed bidders because this allows to lower the informational rents paid to the informed bidders. Last, we find that, with bi-lateral risk neutrality, the seller always awards the good to the uninformed bidders thereby keeping all the surplus. Copyright Springer-Verlag Berlin/Heidelberg 2006Multi-units auctions, Common value, Mechanism design, Revelation principle.,

Measuring the impact of information aggregation mechanisms: An experimental investigation

Abstract This paper measures the effectiveness of market-based and cheap-talk information aggregation. Both information aggregation mechanisms (IAMs) are frequently used prior to IPOs and sales of Treasury bonds - it is largely acknowledged that they provide agents with useful information for subsequent bidding. In a laboratory experiment, we study how information provided by IAMs interacts with private and public information and how agents integrate it in their strategic behavior in a multi-unit common-value uniform-price auction. In market-based IAMs, information gathering prevails and subsequent bidding shows that subjects acknowledge the precision of information. However, in cheap-talk IAMs, there is almost no transmitted information.Market design Information aggregation Cheap-talk Auction Initial public offering