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This paper analyzes financial intermediation chains in a search model with an endogenous intermediary sector. We show that the chain length and price dispersion among interdealer trades are decreasing in search cost, search speed, and market size but increasing in investors' trading needs. Using data from the U.S. corporate bond market, we find evidence broadly consistent with these predictions. Moreover, as search speed approaches infinity, the search equilibrium does not always converge to the centralized-market equilibrium: prices and allocation converge, but the trading volume might not. Finally, we analyze the multiplicity and stability of the equilibrium. JEL classification: G10

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We analyze the canonical nonlinear pricing model with limited information. A seller o¤ers a menu with a …nite number of choices to a continuum of buyers with a continuum of possible valuations. By revealing an underlying connection to quantization theory, we derive the optimal …nite menu for the socially e¢ cient and the revenue-maximizing mechanism. In both cases, we provide an estimate of the loss resulting from the usage of a …nite n-class menu. We show that the losses converge to zero at a rate proportional to 1=n 2 as n becomes large.

No abstract