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Questions and Answers
In a decentralized market, how do buyers and sellers interact?
What is the role of a market maker in an intermediated market?
What is a primary difference between decentralized and intermediated markets?
What is one primary function of an intermediary in a market?
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How does the role of a platform operator differ from that of a dealer?
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In the context of the digital economy, which intermediary role has become particularly important?
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What is an example of an infomediary role in e-commerce?
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Which aspect do trusted third parties primarily focus on within the market?
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Why might a decentralized market benefit from the presence of intermediaries?
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What is one potential gain from trade facilitated by intermediaries?
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Study Notes
Intermediated Trade vs Decentralized Market
- Intermediaries are known as "market makers" and buy products at a "bid" price and resell at an "ask" price.
- They profit from the difference between these two prices, while consumers can participate in the random matching market for free.
Intermediated Trade - Example
- Buyers: Barry (willing to pay 100),Belinda(willingtopay100), Belinda (willing to pay 100),Belinda(willingtopay60)
- Sellers: Steve (willing to sell for 80),Sally(willingtosellfor80), Sally (willing to sell for 80),Sally(willingtosellfor20)
- Gains from trade: Assumed to be split evenly between buyer and seller.
- Barry and Steve trade: Both earn (100−100 - 100−80) / 2 = $10
- If no trade: Buyers and sellers earn zero
Decentralized Matching Market
- Ideal Scenario: Barry trades with Sally for a profit of $80
- **Random Matching: **
- Barry trades with Sally for a profit of 100−100 - 100−20 / 2 = $40
- Belinda trades with Sally for a profit of 60−60 - 60−20 / 2 = $20
- Sally prefers to sell through an intermediary if the intermediary's price is greater than or equal to 20(becauseshecanalsotradewithBelindaandget20 (because she can also trade with Belinda and get 20(becauseshecanalsotradewithBelindaandget20)
Intermediated Trade - Reseller
- The intermediary sets prices to maximize profit.
- The intermediary sets the 'ask' price equal to Sally's price, which is $20.
- Belinda and Steve do not trade with the intermediary because their prices are not favorable.
- This results in an equilibrium where high-value buyers (Barry) and low-cost sellers (Sally) self-select onto the intermediated market.
Impact of Reseller
- The intermediary restores market efficiency but makes all participants worse off.
- The intermediary makes a profit because it provides better deals for high-value buyers and low-cost sellers than what the matching market provides.
- Intermediated trade improves welfare by avoiding inefficient trades.
Intermediaries - Roles
- Dealer: Buys goods or services from suppliers and resells them to buyers
- Platform Operator: Provides a platform for buyers and sellers to interact
- Infomediary: Acts as an information gatekeeper
- Trusted Third Party: Acts as a certification agent
Importance of Intermediaries
- Intermediaries are essential for the functioning of markets.
- The digital economy has changed the way they operate.
- Platforms operate as Dealers, Infomediaries, and Trusted Third Parties (Example: Amazon)
Amazon Example
- Started as a dealer selling books to consumers.
- Expanded to a platform for third-party sellers to reach Amazon consumers.
- Provides a way for consumers to review and rate products.
- Acts as a trusted third party by managing reputation systems.
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Description
This quiz explores the concepts of intermediated trade and decentralized markets. It explains how market makers operate, the dynamics of buyer-seller interactions, and the benefits of trade in both scenarios. Test your understanding of these fundamental economic principles.
