Market Organization
with Price-Setting Agents

Last Updated: 28 March 2015

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

Home Page for EE/Econ 458

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 for Q|                 |Payment for Q
     ------------>|                 |--------->
                  |                 |
         Bid      |     BROKER      |    Ask
     (Buy Offer)  |                 |(Sell Offer)
                  |                 |   
      Units of Q  |  (Passed Thru)  | 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).

Examples of Bilateral Trades:

A power purchase agreement (PPA) between a buyer and seller of electric energy; a loan you arrange with a family member; the self-sale of a home, the self-sale of a used car.


Key Aspects of OTC Markets:

OTC Market Examples:

Markets for corporate bonds; markets for U.S. Treasury bonds and notes; the NASDAQ stock market; used car dealerships; the Foreign Exchange Market


Key Aspects of Auction Markets:

Two Basic Types of Auctions:

1. One-Sided Posted-Offer Auction

Examples of Single-Sided Auctions:

Retail stores, eBay, Priceline,...

2. Call Double Auction

Examples of Call Double Auctions:

Day-ahead energy markets, various business-to-business (B2B) Internet markets


Key Aspect of Organized Exchange Markets:

Examples of Organized Exchanges:

Electric power market exchanges, New York Stock Exchange (NYSE) EuroNext, real estate markets

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