Instability of Centralized Markets∗

Centralized markets reduce the costs of search for buyers and sellers. Their ‘thickness’ increases the chance of order execution at competitive prices. In spite of the incentives to consolidate, some markets, securities markets and online advertising being the most notable, are fragmented into multiple trading venues. We argue that fragmentation is an inevitable feature of any centralized market except in certain special circumstances.1 ∗An earlier draft of this paper was circulated under the title “On Fragmented Markets”. †Risk and Insurance Management Department, Robinson College of Business, Georgia State University ‡Department of Economics and Department of Electrical and Systems Engineering, University of Pennsylvania 1We thank Scott Kominers, Shengwu Li, Marek Pycia, Marzena Rostek, Gabor Virag, and participants of the 2013 NSF conference on General Equilibrium for useful comments.