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</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.</p> Signup and view all the answers

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

    <p>Platform operator</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</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</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.</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</p> Signup and view all the answers

    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.

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