Competition, market structure, and market imperfections : an examination of the Nasdaq Stock Market
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This paper examines the relationship between competition, market structure and market imperfections. In particular, the discussion refers to critical institutional features of the Nasdaq dealer market and their efficiency in promoting a competitive environment that eliminates the possibility of collusive agreements. The discussion reveals that neither the presence of large number of dealers for any given stock, nor Nasdaq's seemingly negligibly small entery barriers are sufficient conditions supporting a competitive market environment. I show that the SEC Order Handling Rules succeeded in improving market efficiency at the Nasdaq and even forced competition in the most actively traded issues i.e., in those securities with the highest prevailing degree of competition. In contrast, the expected benefits of the decimal pricing system have not completely been realized.