Market Microstructure: Intermediaries and the Theory of the Firm

by Daniel F. Spulber

• ISBN13: 9780521659789
• ISBN10: 0521659787
• Format: Paperback
• Copyright: 1999-04-13
• Publisher: Cambridge University Press

Summary

This book presents a theory of the firm based on its economic role as an intermediary between customers and suppliers. Professor Spulber demonstrates how the intermediation theory of the firm explains firm formation by showing how they arise in a market equilibrium. In addition, the theory helps explain how markets work by showing how firms select market-clearing prices. Models of intermediation and market microstructure from microeconomics and finance shed considerable light on the formation and market-making activities of firms. The intermediation theory of the firm is compared to existing economic theories of the firm including the neoclassical, industrial organization, transaction cost, and principal-agent models.

Table of Contents

Preface and acknowledgments	ix
Introduction	xiii
The intermediation theory of the firm	xiii
Market microstructure	xvii
Intermediated exchange versus matching and searching	xix
Alleviating adverse selection	xxii
Mitigating moral hazard and opportunism	xxv
Delegation to intermediaries	xxvii
Outline of the book	xxix
Part I: Market microstructure and the intermediation theory of the firm
Market microstructure and intermediation	3	(24)
Who decides?	4	(3)
The circular flow of economic activity	7	(6)
Comparison with other economic theories of the firm	13	(8)
Intermediation in the U.S. economy	21	(5)
Conclusion	26	(1)
Price setting and intermediation by firms	27	(34)
Price setting by intermediaries	28	(6)
Allocation under uncertainty and over time	34	(6)
Price adjustment by intermediaries	40	(8)
Inventories and market clearing by intermediaries	48	(9)
Conclusion	57	(4)
Part II: Competition and market equilibrium
Competition between intermediaries	61	(56)
Bertrand competition for inputs with homogeneous products
Bertrand price competition with differentiated products and purchases	68	(3)
Bertrand competition with switching costs	71	(3)
Bertrand competition when costs differ	74	(5)
Conclusion	79	(2)
Intermediatiion and general equilibrium	81	(2)
The neoclassical theory of the firm	83	(11)
Transaction costs and Walrasian equilibrium	94	(2)
Monopoly intermediation in general equilibrium	96	(8)
Monopolistic competition	104	(2)
Conclusion	106	(2)
Appendix	108	(9)
Part III: Intermediation versus decentralized trade
Matching and intermediation by firms	117	(23)
Intermediation versus a matching market	118	(8)
Costly intermediation	126	(4)
Intermediation with random matching	130	(4)
Intermediation and matching with production	134	(3)
Conclusion	137	(3)
Search and intermediation by firms	140	(31)
The market model	144	(6)
Market equilibrium	150	(4)
Comparison with Walrasian equilibrium and with monopoly	154	(5)
Market equilibrium with continual entry of consumers and suppliers	159	(3)
Conclusion	162	(2)
Appendix	164	(7)
Part IV: Intermediation under asymmetric information
Adverse selection in product markets	171	(32)
Intermediated trade	173	(6)
Intermediated trade with production	179	(3)
Market clearing by intermediaries	182	(11)
Product quality and guaranties by experts	193	(4)
Conclusion	197	(1)
Appendix	198	(5)
Adverse selection in financial markets	203	(26)
Insiders, liquidity traders, and specialists	205	(6)
Competition between specialists	211	(4)
Informed intermediaries	215	(4)
Credit rationing by financial intermedairies	219	(5)
Conclusion	224	(5)
Part V: Intermediation and transaction-cost theory
Transaction costs and the contractual theory of the firm	229	(27)
Transaction costs versus management costs	232	(4)
Transaction costs, uncertainty, and bounded rationality	236	(9)
Transaction costs and opportunism	245	(6)
Transaction costs and ownership	251	(3)
Conclusion	254	(2)
Transaction costs and the intermedaition theory of the firm	256	(33)
Transaction costs and market microstructure	259	(7)
Intermediation and vertical integration	266	(10)
Intermediation and opportunism	276	(5)
Intermediation and ownership	281	(4)
Conclusion	285	(4)
Part VI: Intermediation and agency theory
Agency and the organizational-incentive theory of the firm	289	(30)
Vertical integration and the boundaries of the firm	291	(8)
Coordination of agents by the firm	299	(7)
Delegation of authority by owners to managers	306	(8)
Delegation of authority by managers to employees	314	(3)
Conclusion	317	(2)
Agency and the intermediation theory of the firm	319	(25)
What is an agent?	321	(8)
Delegated bargaining	329	(3)
Delegated competition	332	(3)
Delegated monitoring	335	(7)
Conclusion	342	(2)
Conclusion	344	(1)
The intermediation theory of the firm	345	(3)
Market microstructure and intermediation	348	(2)
Management implications	350	(1)
Public policy implications	351	(2)
References	353	(16)
Index	369