Article | Journal of Business | July 2005

Price Improvement in Dealership Markets

by Matthew Rhodes-Kropf

Abstract

Price improvement refers to the practice whereby dealers order executions that improve on quoted prices. Why are these improvements given? Standard thinking is that competition causes dealers to give better prices to customers with less information. This paper contrasts this with a novel theory in which customers negotiate improvements and differential pricing arises from differences in customers' market power. Each theory impacts the formation of bid/ask spreads in empirically distinguishable ways. Understanding price improvement and its impact on market participants is critical the regulation of markets, particularly since equal execution is such an important stated goal of the SEC.

Keywords: Price; Markets; Competition; Information; Customers; Negotiation; Mission and Purpose; Practice; Theory; Performance Improvement; Bids and Bidding; Governing Rules, Regulations, and Reforms;

Citation:

Rhodes-Kropf, Matthew. "Price Improvement in Dealership Markets." Journal of Business 78, no. 4 (July 2005): 1137–1172.