Intermediated Trade vs Decentralized Market

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Questions and Answers

In a decentralized market, how do buyers and sellers interact?

  • They interact freely and are matched randomly. (correct)
  • They rely on a market maker for transactions.
  • They must negotiate prices individually.
  • They are charged fees to participate.

What is the role of a market maker in an intermediated market?

  • To process trades randomly among participants.
  • To buy at a 'bid' price and sell at an 'ask' price. (correct)
  • To charge buyers fees for transactions.
  • To provide free transactions to consumers.

What is a primary difference between decentralized and intermediated markets?

  • Decentralized markets have fixed pricing only.
  • Intermediated markets eliminate the need for buyers and sellers.
  • Intermediated markets have a third party that facilitates transactions, while decentralized markets do not. (correct)
  • Decentralized markets involve high transaction fees while intermediated markets do not.

What is one primary function of an intermediary in a market?

<p>Facilitating transactions between buyers and sellers (B)</p> Signup and view all the answers

How does the role of a platform operator differ from that of a dealer?

<p>A platform operator creates an environment for transactions, while a dealer buys and sells goods. (C)</p> Signup and view all the answers

In the context of the digital economy, which intermediary role has become particularly important?

<p>Platform operator (C)</p> Signup and view all the answers

What is an example of an infomediary role in e-commerce?

<p>Allowing users to review and rate products (C)</p> Signup and view all the answers

Which aspect do trusted third parties primarily focus on within the market?

<p>Ensuring the reliability or quality of products or sellers (B)</p> Signup and view all the answers

Why might a decentralized market benefit from the presence of intermediaries?

<p>Intermediaries help reduce transaction costs and improve market efficiency. (C)</p> Signup and view all the answers

What is one potential gain from trade facilitated by intermediaries?

<p>Improved access to diverse products and services (C)</p> Signup and view all the answers

Flashcards

Intermediated Trade

Trading through an intermediary (market maker) who buys at a low price and sells at a high price.

Decentralized Market

A market where buyers and sellers directly interact without intermediaries.

Market Maker

An intermediary who sets prices and facilitates trades.

Bid Price

The price at which a market maker is willing to buy a product.

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Ask Price

The price at which a market maker is willing to sell a product.

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Profit (intermediary)

Difference between the ask price and bid price.

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Gains from Trade

The combined benefit for buyers and sellers due to a transaction.

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Intermediary's Profit

The profit earned by the market maker.

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Equilibrium

A state where high-value buyers and low-cost sellers are in a favorable trading position.

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Efficient Trade

A trade that maximizes benefit for all participants involved.

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Dealer (Intermediary)

Buys from suppliers and resells to buyers.

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Platform Operator (Intermediary)

Creates a platform for buyers and sellers to interact.

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Infomediary

Intermediary that acts as an information gatekeeper.

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Trusted Third Party

Intermediary that provides a certification process or validates identities.

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Random Matching Market

A decentralized market with no intermediary.

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Amazon Example

Started as a dealer, then expanded to a platform and a trusted third party.

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Digital Economy

An economy driven chiefly by digital technologies.

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Market Efficiency

Measure of how well a market achieves optimal resource allocation.

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Welfare

Overall well-being of participants in the market.

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Intermediary's Role

Plays a role as Dealer, Platform Operator, Infomediary, or Trusted Third Party.

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Impact on Welfare

Restores market efficiency, but makes some parties worse off.

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Inefficient Trades

Trades that create a net loss for the buyers and sellers involved.

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High-Value Buyers

Buyers willing to pay more for a product.

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Low-Cost Sellers

Sellers willing to sell for less.

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Self-selection

Buyers and sellers choosing to participate in the intermediated market.

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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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