Market Organization
with Price-Setting Agents

Last Updated: 12 April 2024

Leigh Tesfatsion
Professor Emerita of Economics
Courtesy Research Professor of ECpE
Iowa State University
Ames, Iowa 50011-1070
tesfatsi AT

Home Page for Econ 308

A. What is Market Organization?

An asset is anything of durable value, whether physical or financial in form. Examples include: Apple; computer; battery-stored energy; insurance contract; loan contract; ...

A service is an action taken by an entity that provides benefit to another entity. Examples include: Haircut; health-care; labor; ...

A market is any context in which the buying and selling of an asset or service takes place.

Market Organization is the manner in which exchange in a market takes place. It is determined over time by a combination of factors, including:

B. Two Key Market Player Types: Brokers and Dealers

Key defining aspects of a BROKER:

Broker Examples:

Real estate brokers, stock brokers,...

Diagrammatic Illustration of a Broker:

       Payment     -----------------  Payment
     ------------>|                 |--------->
      Bid         |     BROKER      |      Ask
   (BuyOffer)     |                 |   (SellOffer)
                  |                 |   
                  |  (Passed Thru)  |
       Units of Q  -----------------  Units of Q

Key defining aspects of a DEALER:

Dealer Examples:

Retail store owners, new and used car dealers, Nasdaq stock dealers,...

Diagrammatic Illustration of a Dealer:

      Payment     -----------------  Payment
    ------------>|Dealer     Dealer|--------->
                 |Ask           Bid|
  Buyer          |     DEALER      |     Seller
                 |                 |
   <-------------|  Q Inventory    |<---------
     Units of Q  |                 |  Units of Q

C. Four Basic Types of Market Organization

  1. Bilateral Trade (self-organized)

  2. Over-the Counter (OTC) (managed by dealers)

  3. Auction (managed by brokers)

  4. Organized Exchanges (managed by combination broker/dealers)


Key aspect of Bilateral Trade:

Buyers and sellers self-search for trade partners -- there is no intermediary (go-between).


loans sought from friends/family, self-sale of homes, self-sale of used cars, some job markets


Key Aspects of OTC Markets:

OTC Market Examples:

Corporate bond markets, Nasdaq stock market, used car dealerships


Key Aspects of Auction Markets:

Two Basic Types of Auctions:

1. One-Sided Posted-Offer Auction

  • The protocols (rules) governing the auction are public knowledge.

  • If the auction is a SELLER posted-offer auction, the SELLERS publicly post their asks (offers to sell) in advance.

  • If the auction is a BUYER posted-offer auction, the BUYERS publicly post their bids (offers to buy) in advance.

  • Each participant on the OTHER side of the market then tries to secure the best possible posted offer for themselves, following auction protocols.

Examples of Single-Sided Auctions:

Retail stores, eBay, Priceline,...

2. Call Double Auction

  • The rules (protocols) governing the auction are public knowledge.

  • The auction is conducted through a centralized facility that can take various forms (e.g., a human auction manager, or a web screen that automatically processes data input)

  • Sellers submit asks to the centralized facility.

  • Buyers submit bids to the centralized facility.

  • The centralized facility matches these asks and bids in accordance with the auction protocols.

Examples of Call Double-Sided Auctions:

Various business-to-business (B2B) Internet markets, day-ahead electricity markets, ...


Key Aspect of Organized Exchange Markets:

  • Organized exchanges combine auction and OTC market features in that they are centralized facilities managed in part by "specialist traders" who combine broker and dealer functions

Examples of Organized Exchanges:

New York Stock Exchange EuroNext, electricity power exchanges, real estate markets

Copyright © Leigh Tesfatsion. All rights reserved.